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UP Yatra India meets Bharat CONTRIBUTING ANALYSTS

Dipen Sheth, Head – Institutional Research [email protected], +91-22-6171 7339 FINANCIALS – Page 8 Darpin Shah [email protected], +91-22-6171 7328

Vishal Rampuria [email protected], +91-22-6171 7325

Pranav Gupta [email protected], +91-22-6171 7337 AUTOS – Page 25 Sneha Prashant [email protected], +91-22-6171 7336 CONSUMER – Page 38 Naveen Trivedi [email protected], +91-22-6171 7324 MATERIALS – Page 52 Ankur Kulshrestha [email protected], +91-22-6171 7346

Meera Midha [email protected], +91-22-6171 7334 REAL ESTATE, INFRA – Page 61 Parikshit Kandpal [email protected], +91-22-6171 7317

14 July 2017

PROLOGUE

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Why UP? Why now? This was the common refrain from everyone we met in May, when we mentioned our upcoming drive through India’s most populous (and arguably most under-performing) state. As stock market analysts, we were supposed to dig out winners, not laggards. Why would we want to drive through a state that had lagged India for decades, perhaps since independence?

The answer lies in the parallels that can be drawn between India and UP in their respective settings. If you are a global investor, you cannot but make India central to your investing decisions today, as it shrugs off decades of under-performance and seeks its rightful place in the global economic order. And if you are an Indian investor, you may well find UP providing some crucial insights into many of your investment decisions.

Consider this for a moment : India’s position in the global economy is (believe it or not) roughly the same as UP’s position in the Indian economy. India houses ~16% of the world’s population, contributing just about 8% of global GDP on a PPP basis. For us, this parallel was enough to trigger a 1,500 km drive through Uttar Pradesh (and a bit of Uttarakhand, too)

- Team HDFC Sec

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A new dawn for UP, and for India… Three years ago, Indians voted for a political change,

and ushered in a right-of-centre, reformist government. This new setup was led by a bold leader (Narendra Modi) who emphasised development, adoption of digital technology and tax/subsidy reform, while clamping down on corruption, bureaucratic slack and the anti-business policy mix. To be sure, he carried a controversial past. So far, despite some obvious misses and controversies, there is overwhelming evidence that his government is delivering on a variety of fronts. Most importantly, cynical resignation has been replaced with hope and confidence across a wide cross section of Indians.

Meanwhile, some three months ago UP voted for a similar political change. In Mar-17, UP ushered in a right-of-centre government, led by a somewhat controversial leader (Yogi Adityanath). In our travels through UP last month (Jun-17), we sensed anticipation, confidence, hope, belief and some cynicism too.

To us, UP looked a bit like what India offered for many years to foreign investors : consistent under-achievement amidst apparent potential. Most macro indicators (not just per capita income) are lagging,

whether it is literacy/education, public health services, infrastructure, urban development, law & order, water, sanitation and power. Poverty is endemic. The workforce is skewed towards agriculture, organised sector jobs are in chronic short supply. Endemic corruption impaired government institutions. Cynical and divisive politics, laced with left-of-centre rhetoric and crony capitalism abound in

the rot. Interestingly, our ‘Mood

of the State’ opinion poll (see inside) suggests a cautiously optimistic mood, certainly not the runaway bullishness that Modi basked in for the first few months post his ascent to the PM’s position. Our sense is that UP is

key to the ruling party’s prospects for re-election in 2019. Hence the Yogi Adityanath government actually has a small window of just under two years to deliver big bang results in Uttar Pradesh – real as well as campaign fodder. We expect rapid fire action in Lucknow and elsewhere in the state. Sensitivity to government

actions is high. For a state that is struggling at ~6% GDP growth (and contributes ~8% to India’s GDP), it is feasible to drive up growth by an additional 5-6% with the levers at government disposal. That implies ~50bps upside to India’s macro growth!

UP YATRA

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Hope points UPwards Gloom, with new found optimism We drove 1,600 km through the heat and dust of

Uttar Pradesh in Jun-17 to get a ground level, anecdotal understanding of macro, business and political dynamics in India’s largest under-performing state. We were surprised to see citizens’ optimism on the direction of the economy, even as they expressed gloom on law and order, jobs and business momentum.

Urban areas are worse in UP than in most other parts of the country. Cities like Varanasi, Ayodhya, Faizabad, Gorakhpur, Kanpur, Agra, Aligarh and Meerut are in a shambles, with poor municipal evolution. Basics like public transport, drainage, sanitation and road infrastructure are nearly absent or ramshackle and there is little evidence of planned development.

Barring the Varanasi-Gorakhpur stretch, inter-city highways are in surprisingly good state. The technically incomplete (but open to use, free of tolls) 6-lane Lucknow-Kanpur Expressway (a UPEIDA project) is among the best highways in the country. There are no by-passes for most cities.

As expected, the capital city of Lucknow is somewhat better than other cities, especially the areas that house government offices and housing colonies! The Lucknow Metro is under construction; citizens are gamely taking the surface disruptions in their stride.

Our meetings We met six key bureaucrats in Lucknow apart from

cross-state meetings with companies like HDFC Bank, HDB Financial Svs, Bharat Financial Inclusion, Cholamandalam Investment & Finance, Mahindra &

Mahindra Financial Services, Shriram City Union Finance, Dewan Housing Finance (DHFL) and Satin Creditcare. We also met unlisted cos such as Sonata, Cashpor Micro Credit and Aadhar Housing (subsidiary of the listed DHFL) and Shubham Housing.

We caught up with dealers and distributors of cement, FMCG, appliances and automobile brands and visited the plants of Patanjali and Havells in Uttarakhand (the erstwhile Himalayan part of UP). Overall, we had 150+ meetings over two weeks.

Varanasi : A city in disrepair, like others in UP

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What we found Our experiences suggest that like the rest of India, UP

is in the throes of fundamental changes in the operating environment (infrastructure, policy and governance) for businesses and citizens. Citizens are mostly optimistic, and believe that the new government will unleash a multi-year transition. While this may face practical hurdles in the near term (bureaucratic sloth, GST hiccups), it can open the doors to sustainable economic growth in the future. We foresee a meaningful upside to national consumption demand (staples and discretionary) if this growth pans out, given the heavy contribution that UP has in India’s demographic mix.

Reforms in power distribution, creation of highways, urban infrastructure and low cost housing are aggressively being implemented in UP. Our meetings with bureaucrats were uniformly impressive. We were surprised to see the vision, clarity and confidence that underpinned their intent to change the status quo. There was mature recognition in most meetings that the real challenges lay in improving governance. The bureaucrats we met were all execution-focussed, successfully delivering within tough deadlines, financially savvy and explicitly mentioned to us how empowered they were.

The business community was a bit cynical, we must confess. GST is a near term hiccup, at least. Retailers were gradually de-stocking as July approached, while distributors of FMCGs were not worried at all (having been assured of compensation from their principals), while maintaining a sluggish outlook on demand growth. Credit culture (particularly in Western UP) is poor across corporate / SME / retail /agri segments and will (hopefully) evolve as the operating environment improves. Microfinance is struggling

with high delinquencies in many places, but lenders are surprisingly aggressive, given the size of the opportunity. On specific companies, we sensed rising marketshare in UP’s cement market for Birla Corp (post the Reliance acq’n), with ACC taking some of the hit.

Power distribution is being revamped, privatised

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Mood of the State : Optimism with Yogi at the helm CONFIDENCE, OPTIMISM

POLITICS & SOCIETY

0 1 2 3 4 5

Will your business/income be higher next year?

Is India better off today than one year ago?

Are India's basic hurdles (poverty, corruption, under-development, injustice) on the way to a solution?

Will India's economy improve hereon?

Is India better off today than five years ago?

StrongAgree

AgreeNeutralDisagreeStrongDisagree

0 1 2 3 4 5

Has Yogi Adityanath made a positive difference to UP?

Is he a better alternative to Akhilesh Yadav?

Is Modi likely to win in 2019?

Is India doing the right thing in Kashmir?

Are you in favour of a national beef ban?

Should Triple Talaq be banned?

StrongAgree


Indirect endorsement for Modi after 3 years

Reasonably strong optimism

Hope and optimism on Indian macros

Yogi scores across respondents

BJP on a roll driven by Modi

Good support for recent political decisions

Strong consensus against a regressive social practice

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ECONOMICS

GOVERNANCE

0 1 2 3 4 5

Is the monsoon good this year?

Is it better than last year?

Is inflation in control?

Are new businesses coming up?

Are there new jobs?

Do you think UP's economy is improving?

StrongAgree


0 1 2 3 4 5

Are you GST-ready?

Can GST simplify business?

Do you think GST will work?

Was demonetisation a good idea?

Has demonetisation hit politicians/businessmen?

Is law and order a big problem in your area?

Was it a big problem one year ago?

Is there more corruption than a year ago?

StrongAgree


High confidence on the monsoon

Optimism on inflation

Worries expressed on the lack of jobs and new businesses

Still, reasonable optimism on UP’s economy

Reasonable confidence and buy-in on GST

Support for demonetisation has not ebbed

Law and order worries persist

Neutral view on corruption

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FINANCIALS Despite being the most populated state, Uttar Pradesh has witnessed low macro growth for decades. Over a period of time, the contribution from UP to India's GDP has come down. As financials largely mimic the state of the economy, UP’s financial penetration is low, as compared to progressive states like Gujarat, Maharashtra and Tamil Nadu. As on Mar-17, the banking system had a mere 4.4% credit exposure to the state of UP vs. 5.2% in Gujarat, 9.0% in Tamil Nadu, 12% in Delhi and ~29% in Maharashtra.

During our 14-day field visit across UP, we covered various retail finance verticals viz. Vehicle finance (PV, CV and 2W), Mortgages (Housing and LAP), SME, PL, etc. across banks and NBFCs.

Growth trends across segments are encouraging, and should remain buoyant, especially in the CV spacer. The optimism in the segment is led by the ban on overloading and higher vintage vehicles (10 years+), increasing infra spends and commencement of mining activities (E-auctions).

Asset quality trends are divergent in certain segments (even at the company level), despite similar customer profiles. Lenders have different strategies for the same areas/regions and communities, which we believe is one of the reasons for the divergent performance. (SCUF has no region/area or community banned).

The MFI sector has started recovering from demonetisation and state election blues. However, Agriculture is expected to witness deterioration in stress levels, owing to the state loan waiver.

With a strong state government, we expect that improving infrastructure and law and order will give confidence to the lenders, and lead to better macro economic growth in the state.

India : Statewise Deposits and Credit State Deposit (%) Credit (%)

Punjab 3.1 2.6

Rajasthan 2.9 2.7

Kerala 3.8 3.1

Andhra Pradesh 2.3 3.2

Uttar Pradesh 8.3 4.4

Gujarat 5.7 5.2

Karnataka 7.3 6.6

Tamil Nadu 6.2 9.0

Delhi 10.3 12.3

Maharashtra 20.1 29.0 Source: RBI

Darpin Shah [email protected] +91-22-6171 7328

Vishal Rampuria [email protected] +91-22-6171 7325

Pranav Gupta [email protected] +91-22-6171 7337

UP YATRA

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Vehicle finance The vehicle finance segment is very competitive throughout UP, with the presence of large private and foreign banks, PSBs and NBFCs. Further, mid-tier private banks (e.g. DCBB) are also making inroads in this region. Post the recent restructuring, Magma Fincorp (MGMA) has also restarted UP operations.

While the customer segment/profile largely remains the same for NBFCs, asset quality performance has been divergent across players. This is largely driven by an aggressive push from parent OEMs. Most players are hopeful of improving CV loan growth, with a ban on overloading and higher vintage vehicles (10 years+), increasing infra spends and commencement of mining activities (E-auctions). Notably, competitors believe that SBIN has been aggressive (with robust processes) in the cars segment.

MMFS Highest branch network amongst peers (only NBFC to

have presence at the Taluka level). The radius covered by each branch is almost half that of other NBFCs (50-60kms)

Market share: ~50% at MM dealerships (MMFS has the first right of refusal for all deals). In the vehicle category, MMFS enjoys ~45% in Tractors, and has a 20-25% share in Maruti dealerships

TAT lower vs. peers; LTV avg. 65-75%, tenure ~3.5 years

Yields: CIBIL customers borrow for Cars at ~12.5-13%, and at ~11-12% for CVs. Captive users borrow at ~13-15%, FTU at ~14.5-17% and refinance at ~18%

AUM break-up: MM vehicles ~30-33%, Tractors ~30%, Cars ~18% and CV, 3W and refinance form the remaining

CV business is expected to improve, with a ban on overloading, infra spends and commencement of mining activities (E-auctions)

Cash collections (50-80%+) are the highest amongst peers

GNPA levels are ~10-12%. However, May collection efficiency has been +100-105% (across regions); Apr-17 collection efficiency was better vs. Apr-16

The loan waiver will not have a material impact on NBFCs, as they have started educating customers about the waiver’s dynamics

Huge loss at the company. Level, owing to repossession in FY17. Thus, repossession of vehicles has been stopped

Competition: SBIN is aggressive (with robust processes) in the Cars segment.

MMFS Smart Branch At MM Dealership

Source: Company, HDFC sec Inst Research

The vehicle finance segment is very competitive across UP, with the presence of large private and foreign banks, PSBs and NBFCs.

Most players are hopeful of improving CV loan growth, with a ban on overloading and higher vintage vehicles (10 years+), increasing infra spends and commencement of mining activities (E-auctions).

UP YATRA

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MMFS Customer MMFS Collection Monitoring

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

CIFC Sourcing: Largely through dealers, DSA, sales

executives, loan melas, referrals and a visit to the transportation hub. Sourcing for cars and UVs is done only through dealers

Sourcing/Sales team: (1) Retail sales team focusses on LCV/ICV, Cars & UV and 2/3W and (2) The direct sales team focusses on MHCV and old/refinance vehicles

Have started offering 2W loans (only for RE motorcycles) at select locations

Disbursals growth will be driven by the ban on higher vintage vehicles (10 years+), and strict norms on overloading

LTVs are at ~65-85%, avg ~80%;

Yields: Avg. yields at ~15.5-16%, cars at 12-16% and MHCV/LCV at 12-16%

With the TAB initiative, TAT is gradually improving (old vehicles’ TAT reduced to 2-2.5 days vs. 3.5-4 days earlier); TAT is higher vs. peers

CIFC offers trade allowance (TA), based on dealers’ performance (no of cars, IRR and customer quality)

Dealer payout (whichever is lower): LCV - Rs 10,000 or 1%, Cars - Rs 7,000 or 1.5% and Mini LCV - Rs 5,000 or 1.5%

GNPA at ~5.5-7%, were hit by demonetisation, tightening on overloading, some exposure to sensitive areas and the mining ban in Dhlopur (Rajasthan)

Sales of repossessed vehicles are much lower vs. actual repossession

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Ola/Uber vehicles are leading to NPA pileups in Delhi and the NCR region

While cash collections have dropped, they still remain elevated at ~55-60%

Major competition: IIB - combination of NBFC (working culture) and Bank (competitive rates), MMFS (in car segment), Tata Finance and HDBFS. Among banks, AXSB is seen as ‘spoiling the market’!

Aspiring to improve pre-tax RoA by ~50bps to ~3%, driven by higher yields (old vehicles, LCV), efficiency improvement (TAB benefits) and reduced provisions (lower NPAs). RoA focus visible across branches

CIFC’s Advt For Used Trucks


SCUF 2-wheeler loans

Leaders in the 2W business in UP (ahead of HDFCB, CAPF and BAF)

Sourcing: Largely through dealerships and loan melas

Focus on 100-150CC 2Ws; avoid higher CC 2W as they are expensive with low mileage; Hero has the highest share in SCUF’s 2W business

Focus on unbanked customers (no formal income and documentation) and the hinterlands

No ‘negative’ regions or communities

Avg. yields 28+% (range 24-36%), avg. LTV 65-75%, tenure of 18-24 months and ticket size of ~Rs 40,000

TAT at 2-3 hours is the lowest amongst peers (one day in some regions)

NPA at ~3.5%+

Competition: BAF (captive), Hero Finance (captive) and CAPF (higher dealer payouts)

Car loans

Sourcing : Largely dealers, branch and travel agents

Avg. ticket size is Rs 0.2-0.25 mn, PVs major focus

Focus on unbanked customers (no formal income and documentation), traders, transporters, mandi players (vegetable and fruit loading) etc

Yields in the range of 24-30%; LTV at ~70-75% and TAT of ~1-2days (higher for used vehicles).

90DPD at ~4.5%+ of book

Competition: CIFC, Magma (now visible post recent strategy change), some local lenders

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Maruti dealer check Major financiers: HDFCB, ICICIBC and SBIN (urban

region); IIB, CIFC & MMFS (rural region); rural financiers focus more on the self-employed and those with inadequate documents

Business share: HDFCB and MMFS together have ~50% share

Payout: All financiers offer ~1-1.5% payout

Best TAT: MMFS (~1day); in some regions SBIN and HDFCB have higher TAT; no major FI done by MMFS

Yields: SBIN (reducing bal. ~9.8%), MMFS (fixed rate ~6.5%, IRR ~13%); Most of the banks offer <10% rate to govt. employees

Post demonetisation, the percentage of vehicles that are financed has increased to 90% from ~75% earlier

Loan Against Property (LAP) The LAP business continues to remain a competitive space across UP, with the presence of banks, NBFCs (CIFC, BAF, CAPF) and HFCs. While competition continues to rise, the need for ‘accounted’ money has kept the business momentum (40-45% growth) strong for most players. The build up to GST has caused some disruption in the SME segment, owing to de-stocking and lower working capital needs. While asset quality remains under check and balance transfers are not yet a challenge, aggressive offerings (higher tenures of up to 20 years and lower yields at 9-9.5%) remain key monitorables. Among NBFCs, only CIFC has a notable divergence, both in terms of business performance (muted disbursals in FY17) and asset quality (4-5% NPAs, but skewed toward fewer ACs).

CIFC Sourcing: The direct team, i.e. sales/referral form a

large proportion i.e. ~90%; while DSAs contribute ~10%

Two field investigations are made : (1) An outsourced agency conducts a residential and commercial property visit, technical valuation, legal check and risk control unit (fraud verification); (2) The internal team also conducts a residential and commercial property visit, business and income assessment, family background, and end use of loans.

TAT is 7 days; Avg ticket size ~Rs 4-5mn; Exposure > Rs 10mn forms ~7-10% of AUM; LTV 55-60%

Yields are ~12% vs. banks at 9.5-10%, and some NBFCs at <10%.

Self-occupied residential property (95%) and commercial property ~5%; No major exposure to the salaried class

Business segments: Traders, manufactures (leather markets), bakery owners, wood dealers (exports), and textiles dealers

Balance transfer (BT): Exposures below Rs 4mn; Avg. 3-4 exposures/month; DHFL, PNB HF, IIFL and Hero Finance are offering 70%+ LTV for balance transfers; Aggression from ICICIBC, PNB Housing and DHFL has led to moderation in business/AUM growth

GNPA 4-5%; Concentrated towards <10 exposures, but in a higher ticket segment (largest of Rs 36mn).

Post demonetisation, business has been subdued, and borrowers are in a wait-and-watch mode

The LAP business continues to remain a competitive space across UP, with the presence of banks, NBFCs (CIFC, BAF, CAPF) and HFCs. Asset quality remains under check and balance transfers are not yet a challenge, aggressive offerings (higher tenures of up to 20 years and lower yields at 9-9.5%) remain key monitorables.

UP YATRA

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Unsecured loans (PL) The unsecured business (especially the PL segment), is largely focused on the existing customers for most lenders. Customers in focus include the salaried segment for banks and un-banked customers (no formal income and documentation) for NBFCs like SCUF. Asset quality in this segment is relatively better, despite higher yields (unorganised players have yields ~55-60%) and the inherent risks of loans having no asset backing. Further, banks have clearly identified negative territories and customer segments. SCUF is a notable exception. While competition in this segment remains benign, AXSB and CAFL are offering lower rates, and have influenced pricing of late. SCUF is very well placed, with a huge customer base (leads from 2W customers), higher yields and relatively better asset quality performance.

SCUF Sourcing: Largely cross-selling to existing customers

with a satisfactory credit history

Avg. ticket size of Rs 40,000-45,000; yields at 36-40% (lower than unorganised players) and tenure of 24 months

End use of loan proceeds varies from medical payments, educational to weddings and festivals. SCUF does not check or verify end use

Focus on unbanked customers (no formal income and documentation)

No negative territory and customer profile

Competition: AXSB, BAF, CAFL are ‘spoiling the market’

Valuation matrix

BANK Mcap (Rs bn)

CMP (Rs) Rating TP

(Rs) ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)

FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E KMB # 1,763 962 BUY 1,121 136 183 208 44.0 34.5 27.9 6.00 4.38 3.74 13.2 14.0 13.7 1.68 1.90 1.94 ICICIBC # 1,733 298 BUY 317 111 111 132 13.7 14.6 12.0 2.08 2.08 1.66 10.0 10.8 11.6 1.31 1.24 1.29 AXSB 1,226 502 NEU 507 197 217 255 33.3 21.2 13.1 2.60 2.36 2.01 6.8 10.0 14.6 0.65 0.89 1.24 IIB 939 1,579 BUY 1,663 331 382 443 32.9 26.6 21.9 4.77 4.14 3.56 15.3 16.3 17.2 1.78 1.79 1.78 FB 223 115 BUY 128 46 59 64 23.9 21.7 17.0 2.48 1.96 1.79 9.8 9.7 10.2 0.81 0.81 0.86 CUB 104 173 BUY 179 53 62 72 20.7 18.1 15.7 3.29 2.81 2.42 15.2 15.0 14.9 1.51 1.52 1.51 DCBB 61 198 BUY 221 64 79 88 28.3 23.7 18.5 3.10 2.52 2.24 10.8 10.8 11.1 0.93 0.96 1.01 SBIN # 2,238 288 BUY 348 109 126 152 13.8 11.9 9.6 1.67 1.45 1.19 6.8 6.7 7.9 0.42 0.43 0.49 BOB 378 164 BUY 220 88 121 157 27.3 12.5 8.2 1.85 1.35 1.04 3.8 7.9 11.1 0.20 0.42 0.59 Equitas 57 170 BUY 176 63 65 70 36.0 50.5 28.6 2.70 2.61 2.42 8.9 5.0 8.2 2.00 1.11 1.63 Ujjivan 42 351 NEU 354 147 159 175 17.3 25.8 19.1 2.39 2.21 2.01 16.4 8.9 10.9 2.92 1.79 2.01

Source: Company, HDFC sec Inst Research, # Adjusted for subsidiaries value

Customers in focus include the salaried segment for banks and un-banked customers (no formal income and documentation) for NBFCs like SCUF. Asset quality in this segment is relatively better, despite higher yields (unorganised players have yields ~55-60%) and the inherent risks of loans having no asset backing. While competition in this segment remains benign, AXSB and CAFL are offering lower rates, and have influenced pricing of late.

UP YATRA

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Microfinance Uttar Pradesh is the largest state with widespread and fragmented MFI presence. It constitutes 11-12% of the MFI industry (national NBFC-MFI portfolio size is ~Rs 600bn). Our extensive field trip and meetings with many MFIs revealed that the level of stress has dipped considerably post the state elections in Feb-17. Prior to this, the MFI sector in UP was bogged down by weak collections and high PAR (portfolio at risk, or overdues) in the aftermath of demonetisation in Nov-16, exacerbated by local political influences in the run up to the elections in 4QFY17. MFIN data as at Mar-17 reveals PAR in excess of 37% for the state.

However, collection efficiency has improved sharply after the elections. Also, the number of defaulting customers has reduced considerably. Our interactions revealed that collection efficiency is at 90-94% in East UP and ~80-91% in West UP. The latter suffers from notorious borrower behaviour and poor credit discipline.

The recent farm loan waiver has had no discernible impact, with borrowers understanding the difference between farm and MFI loans. Our interactions suggest that competition has risen, along with aggressive lending by many players before demonetisation. Further, many players have resorted to top-up loans to help customers clear past overdues.

Players like Bandhan and Janalakshmi are aggressive in providing very high ticket size loans even to delinquent customers. The seeding of Aadhar IDs for borrowers is expected to eliminate duplicate and fake customers from the system over a period of time. Aadhar is compulsory for all new loans. The write-offs

from current delinquencies are expected to range from 6-9%.

We believe MFIs play an important role in the financial inclusion at the bottom of the pyramid by providing capital for incremental income generation for borrowers. Many players have moved (or are moving) to superior technology through e-KYC and Instant Disbursement within 24 hrs to existing borrowers. This is expected to strengthen the MFI business model, and also help lower opex.

Bharat Financial Inclusion Bharat Financial (BFI) is a south-based NBFC-MFI, with a market cap of Rs 100bn and AUM of Rs 92bn. As at Mar-17, the company has reported PAR of 10% on the on-book AUM. UP contributes 7% to its loan book. During FY17, loan book grew by 19% and faced challenges in 2HFY17 owing to demonetisation. Higher credit cost at 2% led to ROA dropping to 2% from 3% in FY17. We don’t have coverage on BFI. Currently, the stock trades at 3.5x FY19E ABV.

Collection efficiency has increased to 93-94% in East UP. BFI has not provided top-up loans to help customers repay past overdues; provides second loan after 20-25 weeks of re-payment history.

BFI is providing entire disbursement in a cashless method via bank transfer. Collection is on a weekly basis.

Joint Liability Group (JLG) liability hasn’t worked well since demonetisation, as members don’t pay for others beyond a few installments.

Proper Credit Bureau checks are being conducted before disbursing loans. Internal controls and checks are strong, as per our anecdotal evidence.

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BFI has introduced E-KYC and Instant Pay which will lead to higher efficiency and lower opex cost.

Channel and borrower feedback very positive. Est. growth of 30-40% in FY18E in most parts of UP.

Cashpor Micro Credit Cashpor is a Section 25 company, with a presence in eastern UP and Bihar. Headquartered in Varanasi, the company has an AUM of Rs 14bn. The company is among the best-run MFIs. Being a non-profit entity, Cashpor has a focus on income upliftment of people in the lower strata.

Cashpor was founded in 1996 in India by Prof David Gibbons, a PhD in Politics and Economics from Princeton University, who had earlier replicated the Grameen Bank model in Malaysia.

We met Mukul Jaiswal, Managing Director, at his Varanasi office for a discussion on the sector as well as Cashpor. The social transformation focus is an anchor for Cashpor’s operations, rather than mere growth or the achievement of numerical targets every quarter. Cashpor does not lend to people who cross a defined threshold of financial well being. Hence we believe it is actually pulling potential borrowers up the eligibility curve for commercial (or for-profit) MFIs to lend to.

Collection efficiency is in the range of 97-98%. PAR was only 1.5% as at Mar-17.

Cashpor provided flexi-loans to good borrowers during demonetisation and actually stepped UP disbursements at the time.

30% of the borrowers are exclusive to Cashpor, and 70% have loans from other MFIs

Competition is pronounced in urban areas, as it is easy to meet growth targets with a high density of

addressable population. Hence, Cashpor is focussing on rural areas!

Many unregistered MFIs have also emerged, leading to high competition and reckless borrowing. At Cashpor, we sensed an admirable focus on income upliftment, not merely loan book growth.

Collection is on a fortnightly basis. Cashpor provides loans to customers who are re-paying on time, though they might be delinquent at other MFIs.

Cashpor feels that the next 3-4 years may be a rough ride for MFIs as they grapple with unbridled growth (owing to rising popularity and acceptance) and an evolving framework for id/physical verification.

Satin Creditcare Satin is a Delhi-based listed NBFC-MFI, with a market cap of Rs 12bn and AUM of Rs 40.6bn. UP constitutes 33.7% of the book. During FY17, loan book grew by 24%. Satin faced challenges in 2HFY17 owing to the impact of demonetisation.

The higher credit cost at 1.8% in FY17 led to ROA dropping to 0.6% from 2.2%. GNPA (without RBI dispensation) stands at 12.74%, as compared to 0.46% in FY16. We don’t have coverage on this stock. Currently, the stock trades at 2.5x FY19E ABV.

Collection efficiency is in the range of 90%. PAR ranges from 23-25% across branches. Non-paying customers have come down, but are still

high at 8-9%. Top-up loans are being given to borrowers to help

them repay their past overdues. Disbursement is still in the cash mode in a majority of

the centres.

Credit Bureau check is not robust; loans are being given to delinquent customers.

UP YATRA

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Sonata MFI Sonata is an unlisted NBFC-MFI, operating through a network of 314 branches across eight states, with a total managed portfolio of Rs 10.6bn. UP contributes 51% to its AUM. The asset quality indicators of the company deteriorated with PAR>0 and PAR>30 of 25.2% and 13.1% as of FY17. Higher credit cost at 1.82% compared to 0.35% in FY16 resulted in ROE dropping from 22.6% to 5.8% in FY17.

Collection efficiency in the range of 90-91%; expects to reach 97-98% over the next couple of quarters

100% disbursement through cashless and bank transfer mode

Collection on a weekly and fortnightly basis

Does not provide loans to delinquent customers

Aadhar seeding for more than 70-80% borrowers

Don’t think collection will be a challenge, as long as the government does not create impediments like sand mining related issues, beef ban etc, which will hit income generation activities of the borrowers

Capital Trust Capital Trust is a Delhi-based listed NBFC, with a market cap of Rs 6bn and AUM of Rs 4.8bn. The AUM is equally split between MFI and Enterprise (MSME) loans. UP constitutes ~40% of the book, with its presence centred in western UP. During FY17, AUM grew by 20%, and faced challenges in 2HFY17 owing to demonetisation. Higher credit cost at 3%, led to ROA dropping to 2% from 3% in FY17. We don’t have coverage on this stock. Currently, the stock trades at 3.5x FY19E ABV.

Stress levels remain high. The MFI portfolio has a PAR of more than 50-60%

However, the number of customers who have not paid has dipped sharply; non-paying customers are ~12-15% of the book.

The company has been very cautious, and reportedly not disbursed new loans to customers since demonetisation.

Collection is on a fortnightly basis. Disbursement is still on a cash basis.

Performance of the enterprise secured loan (LAP) is also bleak, with PAR of more than 60-70%.

Microfinance borrowers

UP YATRA

Page | 17

Housing loans Housing demand in UP remains robust, with most players growing in excess of 30-35%. Growth in the affordable housing segment is even better at 50-55%. Focus on the low-income self-employed and salaried classes seems to be the strategy employed by lenders and builders. While smaller HFCs are focussing on the assessed income category, most of the bigger HFCs have started focussing on lower ticket size loans at a competitive rate.

Competition is intense, with both HFCs and banks offering very competitive rates. The UP Housing & Development Board is also emphasising on construction of flats, rather than plot sales. The Board plans to build more homes under the affordable housing scheme, which should also provide a fillip to the segment’s growth. Our channel checks suggest an upcoming VAT & Service Tax (now GST) waiver for affordable housing projects, which would boost demand meaningfully.

However, demand in the high ticket size segment (above Rs 5 mn) is yet to recover from demonetisation blues, and a huge oversupply in the areas of the state adjacent to the NCR. Balance transfer has risen in recent months, owing to a sharp correction in lending rates over the last few months. Players like LIC Housing, Can Fin Homes and PNB Housing are very active in balance transfer among HFCs.

Aadhar Housing Aadhar Housing commenced operations in May-2010, promoted by the DHFL group and IFC. The company focusses on the lower and middle-income segment, specifically comprising of the salaried, self-employed, and agricultural income-based population. It has operations mainly in Northern and Western India through a network of 137 branches. As of FY17, AUM was Rs 32bn.

Loan book growing at 30-40%; largely caters to the low-income segment

Home loan and LAP is split in the ratio of 80:20 Interest rates on home loan and LAP are ~11.75% and

~16% Majority of loans are for plot purchase and self

construction Loans were provided both within the municipal limits

as well as in Gram Panchyats Understanding local regulations and the

developmental plan is important Provides loans under the ’no income proof category’

also at an average yield of 14% Split between the self employed, govt jobs and

salaried is 25:45:30 Average ticket size is Rs 0.7-0.8 mn Continues to witness strong growth in the outskirts of

cities 85% of loans sourced through in-house employees Majority of customers are eligible for PMAY CLSS

subsidy scheme; HO takes care of this PAR>30 is 4-5%, while NPA is ~0.5% Balance transfer has increased to more than 10-12%

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Dewan Housing Finance Ltd (DHFL) DHFL is part of the Wadhwa Group, with a market cap of Rs 70bn. It has an AUM of Rs 836bn, with a PanIndia presence. During FY17, AUM loan book grew by 20%. ROA improved during FY17 to 1.57%, owing to a drop in the cost of funds. We don’t have coverage on this stock. Currently, the stock trades at 1.3x FY19E ABV.

Loan book growing at 30-40%; largely catering to the low-to-medium income segment

Home loan and LAP are split in the ratio of 90:10

Interest rates on home loan and LAP is 9.75% and 16%

Plot purchase and self construction constitute 50-60% of the demand

Provides loans under assessed income category at 1-2% higher rates.

Split between self employed and salaried class is 36:64

Average ticket size is Rs 1-1.2 million

Continues to witness strong growth in the Rs 1 to 3 mn range of property prices.

75% of loan sourced through their own employees

70% of borrowers are first-time buyers

Majority of the customers are eligible for PMAY CLSS subsidy scheme; HO takes care of this.

PAR>30 is 2-3% while NPA is 0.5%

Balance transfer is not a challenge

Shubham Housing Shubham is a HFC with a focus on providing retail home loans to low-income borrowers. The company is backed by private equity players like Helion Ventures Partner, Saama Capital, MOSL etc). The company had a managed loan book of Rs 6.48 bn as on FY16. The profitability is low currently (FY16 ROE at 2.8%).

Loan book growing at 60-70%; largely caters to the low income segment

Home loan and LAP split in the ratio of 80:20

Interest rate on home loan and LAP is 15% and 21%

Provides loans under the ‘No income proof ‘ category, at an average yield of 15-16%

Ratio between self employed and salaried class is 70:30

Average ticket size is Rs 0.5-0.7 mn

Continues to witness strong growth in the peripheries of the cities

Housing supply for the under Rs 1mn category is low; Typically borrowers buy a small plot in the outskirts and build a house

85% of loans sourced through in-house employees

Majority of the customers are eligible for the PMAY CLSS subsidy scheme; HO takes care of this.

PAR>30 is 3-4%

UP YATRA

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Agri loans The Agri loan vertical has grown well over the last two years in UP. As cane (the biggest cash crop) is in a positive cycle, farmers have benefitted from timely payment of dues from sugar mills. However, in the last few months, the Agri book has been impacted by the loan waiver announced by the state govt. Most private sector banks do not lend to landless (contract) farmers or those with small land holdings (1 acre or less). Many farmers have reportedly defaulted, despite having the ability to repay, on hopes of being part of the current waiver scheme, or hoping for a waiver during the Lok Sabha elections in 2019.

As we travelled from East UP to the West, we saw that farmers’ fortunes are linked to the crop they produce. Issues like storage challenges, use of poor farming techniques, fragmented land holdings continue to contribute to low farm incomes.

We noticed two clear segments of farmers: a relatively prosperous and politically powerful set of large land holders (who head cooperatives, own tractors, implements and are considerably wealthy), and the typical marginal farmer who may or may not even own the land, and who is at (or close to) subsistence farming levels.

It is the second category that is far less productive, engages in poor farming practices, is not particularly

creditworthy and hence more vulnerable to downcycles. As can be expected, this is a far higher number than the former category.

Agri belts with potato and other horticulture crops have suffered (unlike cane growing areas), owing to low prices amid bumper production. Despite the plentiful cold storage infrastructure (centred around Agra), UP’s farmers do not get remunerative prices for potatoes.

Cold storages have come up mostly in response to government subsidies and do not have flexibility and the requisite efficiency, technology, processes to store other perishable articles appropriately. Owners of such storages are themselves typically speculators in the potato market and frequently incur losses on positions. Mandi / APMC infrastructure is weak with many farmers selling to intermediaries.

We think the recent spate of farm loan waivers, while providing relief to stressed borrowers, runs the serious risk of damaging credit culture, as relatively unstressed borrowers will likely rush into the waiver net. We do not see a structural healing to the persistent problem of agri loan stress in UP (or for that matter across the country) unless market access is opened up for farmers, potential buyers and road/storage infrastructure improves.

UP YATRA

Page | 20

Our Financial Yatra through UP, in Pictures CIFC’s Incentive For Employees CIFC’s Customers

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research CIFC’s Incentive For Employees SCUF Product Offering


UP YATRA

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MMFS Deposits Scheme MMFS Customers


Mahindra Insurance Brokers MMFS Quick Pay Option


UP YATRA

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MMFS Used Trucks Offer HDFCB Customers

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research HDFCB Gold Loan Adv HDFCB PL & BL Adv.


UP YATRA

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HDFCB Standee At RE Showroom Honda (2W) Standee At HDFCB

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research HDB and GIC Housing Branches HDB and HDFC Life Tie Up


UP YATRA

Page | 24

HDB Product Offering HDB Gold Loan Adv.

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research HDB Gold Loan Adv. HDB Employee Success Spotlite


UP YATRA

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AUTOMOBILES: UPar mode We met 20-odd auto dealers during our ‘UP Yatra’, covering over 1,455 kms and cities like Haridwar, Meerut, Agra, Aligarh, Lucknow, Faizabad, Gorakhpur and Varanasi. Our interactions revealed the popularity of UVs in UP. 2Ws are also popular in the state with motorcycles leading in East and Central UP and the growing popularity of scooters in Western UP.

Our takeaways from the UP Yatra Increasing per capita and urbanisation: UP is the

most populated state in India (16% of the country’s population) and the third-largest state by economy, accounting for 7.3% of India’s GDP. UP contribution is ~9/9/14/6/15% of overall CV/PV/2W/3W/tractor volume of the country. Given the good governance and government thrust to increase rural income, we believe per capita GDP of Uttar Pradesh will grow at a CAGR of 10-12% in next five years. This will help to increase the rate of vehicle ownership in state.

Strong automotive demand: Breakout on the anvil: In our recent UP visit we observed the registration of new cars and bikes jumped 25% to 90% in many district of UP. 45 districts registered growth of more than the state average of 10.5% vs 5% growth in FY16.

PV: Maruti (MSIL) is the clear leader The PV segment is dominated by UVs, given the relatively weak

infrastructure (higher ground clearance of UVs helps) and the customer profile (politicians and businessmen).

2W: TVS expanding its presence; while HMSI’s Activa is gaining popularity We reconfirmed our thesis that rural demand for 2Ws is a secular story, with strong double-digit growth expected over the next one or two years. Expectations of a normal monsoon and improvement in rural road infrastructure will add to the growth momentum.

CV: Near term blip long term gain The MHCV segment is going through a lackluster phase, owing to the ban on illegal sand mining, overloading and plying of older trucks on roads (10 years plus), particularly in western UP.

Tractor demand (UP contributes 15% of total sales) is expected to clock ~10% growth in FY18, with expectations of a good monsoon, healthy water levels of many reservoirs, improvement in non-farm income and the government's thrust on rural spending, infrastructure creation and irrigation spending.

Post our UP insights, we reaffirm Eicher (BUY, TP Rs 31,934) and M&M (BUY, TP Rs 1,556) as our top domestic auto bets.

Sneha Prashant [email protected] +91-22-6171 7336

UP YATRA

Page | 26

Segment-wise takes PVs: Leading the way UP and Uttarakhand together contribute 9% to total

domestic PV sales. Our interaction with auto dealers across these states makes us believe that this number can increase to 12% by 2020.

Our travel started with visit to the largest UV player, M&M’s dealership at Haridwar, Uttarakhand. M&M’s highest-selling model is Bolero, followed by Scorpio and XUV500 (all three together contributed 57% to total sales in FY17).

M&M’s Digital Edge

Source: HDFC sec Inst Research Similar to the countrywide trend, Maruti (MSIL) is far

ahead of competition in UP too. MSIL has a share of 50%+ in most markets in UP, followed by Hyundai at 20-25%.

MSIL’s Most Models Have Long Waiting Period

Source: HDFC sec Inst Research

MSIL’s highest-selling models are Alto, Wagon-R, Swift, Dzire, Brezza and Baleno (~68% of sales at the national level).

Maruti : Top Models’ Volume Mix (all India)

Source: SIAM Database, HDFC sec Inst Research

21 20 20 19 16 18 17 16

13 14

13 12 13 12 13 11

- -7 6

8 7 9 9

- - - 2 7 8 8 8

4 3 4 5 4 5 4 5

0%

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50%

75%

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16

2QFY

16

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16

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16

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17

2QFY

17

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17

4QFY

17

Alto Wagon-R Baleno New Vitara Brezza Ciaz

UP YATRA

Page | 27

70-80% of PVs are financed at an average rate of 9%, and there has been an increase of 5-10% in this ratio, post demonetisation. As per the new law under Yogi Adityanath’s governance, dealers cannot accept cash payments of more than Rs 200K. Customers are very much in tandem with this, and prefer RTGS and there is increasing acceptance of digital payments.

Automatic transmission (AMT) penetration is lower than national averages, but is gradually shifting towards automatic. Currently, ratio of automatic to manual stands at 20:80 from 100% a few years ago. A beneficiary of this would be Lumax Autotech Industries, which supplies gear shifters (AMT) to PV OEMs like Maruti, Hyundai.

Lumax : Gear Shifters Gaining From Shift To AMT FY14 FY15 FY16 FY17 FY18E FY19E

Total PV sales (mn units) 2.5 2.6 2.8 3.1 3.4 3.8

LATL's Gear shifter sales (mn units) 1.1 1.3 1.6 1.8 2.1 2.3

Market share (%) 44.3 50.0 55.9 60.0 60.0 61.0

Revenue (Rs mn) 371 481 676 981 1,259 1,630

Gear shifters as % of revenue 4.9 5.8 7.6 9.7 10.4 12.9

Avg. Real’n (Rs) 335 370 433 533 610 694

Vehicle type in LAT’s shifter mix

Manual (%) 98 94 92 85 80 75

AT/AMT (%) 2 6 8 15 20 25

Realisation (Rs) Manual (Rs) 335 352 369 388 407 427

AT/AMT (Rs) 1,004 1,055 1,292 1,357 1,424 1,496


Government employees account for 10-15% of car volumes, with a majority being teachers.

Luxury cars have a big market in urban centres like Kanpur and Lucknow, with sales of 50+ vehicles per month. Audi is the market leader here, followed by Land Rover and Jeep (SUV uptrading). Brands like BMW or Mercedes were hardly visible.

2018 could be a blockbuster year for Hyundai, with three launches planned- i30, New Santro and an SUV. We sensed palpable excitement amongst Hyundai dealers, who otherwise confessed to MSIL’s unbeatable market domination.

The state will be a beneficiary of GST implementation, as it has a higher incidence of VAT at 14.5%, compared to lower rates in other places like Haryana (12.5%) and Delhi (13.5%). As per the current tax structure, total tax incidence is 31.5% (17% excise + 14.5% VAT). However, post GST implementation, the rate will come down to 29%, hence the price of vehicles will reduced. Prices of vehicles have been cut on an average by 3-5%, while they have been increased in the case of hybrid variants of vehicles like MSIL’s Ertiga and Ciaz.

Owing to a lack of clarity on GST rates, and the possibility of lowering of rates for PVs, dealers avoided accumulation of stock. Customers postponed their purchases in a large part of May and the first half of June. Retail sales volumes dropped by 5-10% in most dealerships in the first half of Jun-17, and picked up later.

Hyundai was the first OEM to pass on the benefit of GST pricing, by offering discounts to customers (pre-GST implementation) to push stocks in Jun-17. The company reduced the price of vehicles (i20 prices slashed by Rs 30-35k) to boost sales, and will pay back the differential in pricing post GST, if any. Other OEMs followed suit later.

UP YATRA

Page | 28

M&M Providing Incentives Along With Discounts

Source: HDFC sec Inst Research Given the steady market share improvement, rising

rural contribution, reduced JPY exposure, improving share of premium products, healthy ROE/ROCE (26% in FY19E) and improving free cash flow, we believe MSIL will continue to trade at a premium. Maintain BUY, TP Rs 8,478.

In line with growth in MSIL, we maintain Subros (NR, Fair Value Rs 294) and LATL (BUY, TP Rs 681) as our top bets in the auto ancillary domain.

2Ws: Rural sales to give a leg up UP and Uttarakhand together contribute 14% to the

total 2W sales of the country.

Hero is the clear leader in the two-wheeler market, with 48-50% share across UP. The highest-selling category is the 100-125cc segment (Splendor, Passion Pro, CT Deluxe).

HMSI’s Activa is leading in the automatic scooter market in UP too, as in other parts of the country. This is because it can be used by many (all adult

members of a family can ride it). The CNG Activa is gaining popularity in Western UP, especially in Agra. There is no waiting period for the Activa.

Two Wheeler Market Share In UP (FY17)


One OEM gaining popularity is TVS, which has filled product gaps, and has motorcycles and scooters across several price bands. The best selling vehicles are Apache (160cc) and Jupiter (scooter). Apache’s sales volumes have overtaken Bajaj’s Pulsar in most markets. Bajaj is not preferred by buyers, as the company makes frequent changes in existing models. Dealers allege that faster-selling models are often discontinued. We sense that this can be owing to preferences in UP being different from the rest of India.

Hero and HMSI two-wheelers have the best resale value, and hence have the least or no discounts at dealer showrooms.

The replacement cycle for two-wheelers has reduced over the last five years, from five to six years to two to three years.

Hero47.9

HMSI18.3

TVS15.5

Bajaj13.8

Yamaha1.4

Royal Enfield

2.3

Others0.8

UP YATRA

Page | 29

May and June are typically slow months for the two-wheeler market, owing to the onset of summer. Sales will pick up only in July, with the monsoon driving rural confidence. Interactions with dealers suggested that players like Hero and HMSI will be major beneficiaries of this, as they have a well entrenched dealership network in the state.

However, the new government has created optimism about infrastructure development in this region. . This could be a game changer for HMSI’s Activa, which is sold in lesser numbers as compared to Western UP.

UP and Uttarakhand is one of the biggest markets for Royal Enfield, and contributes ~7% to total sales. But owing to capacity constraints, dealers are not able to fulfill demand. As per the dealers, the new capacity coming onstream in 3QFY18E at Vallam Vadagal will be dedicated to service the high demand in UP. Classic 350 continues to be the highest-selling model, with a waiting period of three months, while other popular models (Thunderbird and Bullet 500) have a 45-day waiting period. Dealers have high sales of spares of close to Rs 200-250K per month, which includes the highest-selling accessory, crash guard (three price points Rs 1,900/2,200/3,500). Helmets, too, are priced in three segments (Rs 1,800/2,500/2,900). RE bikes are more of a status symbol in the state, like M&M’s Bolero and Scorpio.

Given the rising popularity of vehicles like HMSI Shine and TVS Apache, we believe 150-200cc motorcycles will witness strong growth over the next few years.

Enriching Customer Experience At RE


Penetration Rising In Small Cities Like Gorakhpur


UP YATRA

Page | 30

Premiumisation Is The Trend


We maintain our stance on Hero (Neutral, TP Rs 3,740), given the weak positioning in the 125cc and above segments. Unlike the trend in the rest of the country, Bajaj Auto (BUY, TP Rs 3,400) is a laggard in UP, lower than TVS Motors in terms of market share.

We bet on Eicher Motors (BUY, TP Rs 31,934).

CVs: Weak demand, as of now UP is the second largest market for CVs (~9% of total

sales of the country, 69.3k vehicles).

SCV/Pick-ups is most commonly used for the transport of vegetables and construction material. The most popular pick-up is Mahindra’s BMT (Bolero Maxi Truck), with a market share in excess of 60%. The resale value of the vehicle is higher, as it has a powerful engine, and functions without any complaints for five years, as per anecdotal evidence.

M&M: Leading In Pick-ups (In UP Too)


Among LCVs, Eicher is the most popular, owing to its high resale value and powerful engine. In buses, most regions prefer Tata Motors, while others prefer SML Isuzu (Agra, Varanasi). In the bus segment, SML is preferred, as it is less expensive by Rs 300-350k as compared to Tata Motors’ vehicles.

Ashok Leyland has a relatively small market share in UP, as its dealership is not very widespread as in South India. However, the company is gradually setting up new dealerships across the state. Its MHCVs are progressively gaining popularity and its engines are said to be more powerful than those of Tata Motors’ (dealer and fleet operators’ interactions indicate).

23 22 24 22 22 23 25 24

58 56 56 54 57 54 51 52

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Economy Executive Premium

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M&M Tata Motors Ashok Leyland Others

UP YATRA

Page | 31

Top States Contributing To MHCV Volumes (%)


Top States Contributing To LCV Volumes (%)


The MHCV market is down in UP with a ban on mining owing to illegal mining activity in the state. Sand mining leases have been allotted till the e-auction process begins over the next two to three months. UP laws prohibit sand mining between July and September. Hence, the pick-up in demand for MHCVs will kick in only from October.

The MHCV market is dominated by Tata Motors, owing to its strong brand presence and well-entrenched dealership network in North India. Also, its vehicles have the highest resale value among OEMs.

The ban on overloading by the new government has led to a shift in the sale of vehicles from the 10- wheeler segment to the 12 and 14-wheeler segments. Also, the Delhi government has placed a ban on vehicles older than 10 years plying on the road. This directive affects Western UP up to Agra, post which it comes under the jurisdiction of the UP government. It is expected that the UP government will also ban vehicles older than 10 years. This will result in a rise in demand for new vehicles, thereby pushing up sales in 2HFY18.

Also, there was no clarity among truck dealers on GST. Hence, stock levels were running low in June.

However, trade channels feel that 2HFY18 will be very strong for CV players, owing to a build up of pent-up demand, so they may end the year on a flat note.

While there is still a wide gap between Tata Motors and Ashok Leyland in the truck segment, with Tata having a volume edge over Ashok Leyland. There has been stiff competition between the two in the bus segment in UP too, as in the rest of the country.

Maharashtra12.9

Rajasthan8.2

Tamil Nadu8.0

Gujarat7.9 Haryana

7.2

Uttar Pradesh

7.2

Andhra Pradesh

6.8

West Bengal

6.4

Delhi5.5

Karnataka5.0

Madhya Pradesh

4.1

Orissa3.2

Maharashtra15.0

Uttar Pradesh

8.9

Tamil Nadu8.7

Karnataka7.8

Andhra Pradesh

6.9

Gujarat6.7

Rajasthan6.1

West Bengal

5.0

Kerala4.2

Assam4.1

Madhya Pradesh

4.0

Haryana3.6

UP YATRA

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Domestic Tractor Market Share Trend


Our interactions with dealers and fleet operators suggest that Ashok Leyland has created a strong brand name and network in Southern India. It is gradually building a brand presence in the North too. We remain positive on Ashok Leyland (BUY, TP Rs 118).

Tractors: M&M continues to lead Being a major agri state, UP was known to use

tractors only for farming purposes. This trend is changing, as tractors are now being largely used for haulage purposes too. UP is the largest market for tractors and contributes 15% to total tractor sales of the country. M&M is clearly the leader in the state with a market share of 40%.

Traditionally, 70-75% of UP’s land is agri-based, and Escorts (Eastern UP) and M&M (Western UP) have been strong brands in the state.

Domestic Tractor Market Share Trend (%) FY12 FY13 FY14 FY15 FY16 FY17

M&M 41.8 40.6 41.0 40.3 41.3 42.8

TAFE 23.4 25.0 24.8 24.4 23.1 20.5

ITL 8.3 9.6 10.3 12.0 11.9 11.9

Escorts 11.4 11.6 10.7 10.4 10.3 10.8

John Deere 7.4 5.7 5.9 5.3 6.1 7.6

New Holland 5.2 5.1 5.1 5.1 4.5 3.8

VST 1.3 1.1 1.1 1.2 1.5 1.6

SAME DEUTZ-FAHR 0.3 0.3 0.3 0.3 0.2 0.4

Force Motors 0.3 0.4 0.5 0.7 1.0 0.6

HMT 0.7 0.6 0.2 0.2 0.1 0.0 Source: SIAM Database, HDFC sec Inst Research Agra is a big market for potato farming, and accounts

for 8% of the total produce of the country. Here, TAFE dominates, with a market share of ~60%, followed by Escorts at 15%. TAFE is preferred in the region, as it has the oldest dealership, better technology, educates farmers on a continuous basis, door-to-door service, a four-year warranty (lifetime labour free) and has higher customer stickiness. Next in line is Escorts, which dominates the 45HP segment. TAFE’s dominating product is the 42HP tractor. M&M and Punjab Tractors are popular for haulage, as they have lower resale value in the region.

There is gradually a shift to higher horsepower tractors, owing to the increasing use of modern implements, and these require greater power for digging. Three to four years ago, the market used 35-40HP tractors, now dominated by 40-45 HP. Dealers indicated that the market will shift to 55-60 HP tractors in the foreseeable future.

61 62 63 60 59 53

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SML Isuzu Asia Motor Works M&M

UP YATRA

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Higher HP Tractors In Demand (HP Mix)


Escorts is a strong brand in Eastern UP. In Varanasi, it has the oldest dealership. However, Sonalika is slowly gaining traction, given higher resale value, heavier vehicle (aids in longer life), lower load on the engine, lower maintenance and involvement of the company’s employees at each dealership. At present, the tractor market is going through a lull in the region, owing to a ban on illegal sand mining. This is expected to pick up over the next two to three months.

Sonalika Tractors (from the stable of International Tractors Ltd) is gradually gaining market share in East UP, given the following benefits:

Higher resale value than Escorts

Heavier weight of all parts of the vehicle, which leads to a longer life

Combination of engine design and in-house engine oil results in lower maintenance.

Patented diesel-saver unit (hydraulic pump can be disconnected from engine when not required) aids in 5-7HP of savings

Additional weight of 56kg at the front, and equal weight of the three parts of the vehicle (engine, body and wheels and tracks) helps in maintaining the balance of the vehicle

Direct involvement of the company’s employees with each dealership (we saw three employees at every outlet we visited)

Eastern UP (28% of market) is an agri belt, growing three crops a year. The region is dominated by Escorts, followed by Mahindra and Swaraj. Central UP (32%) is dominated by Mahindra and Eicher. Western UP (40%) is known more for haulage, and thus Mahindra is a leader there.

M&M+Swaraj: Market Leader


15 10 11 11 11 8

46 44 35 37 36

32

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UP YATRA

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Sonalika Gaining Popularity In Eastern UP


Across the state, M&M is truly a leader given the well entrenched penetration and brand positioning. This is in line with our view on the stock and we maintain BUY with TP of Rs 1,556.

Electric 3Ws: Changing landscape UP contributes 6% to the total domestic sales of

3Ws.

While travelling through Uttarakhand and UP we encountered e-rickshaws in many cities and were impressed with the comfort and economics of this product.

The vehicle costs ~Rs 135k (cash down) and 150-160k through financing options, with 33-35 months EMIs. It runs on 4 lead acid batteries, costing Rs 25k with warranty of 6 months. However, these are generally replaced only after a year.

At the time of purchase, mileage is 100km per charge and gradually reduces. During conversation with an owner, we found that his vehicle was 8 months old and mileage was around 80km per charge. This vehicle had Evo green batteries (lead acid). Exide also makes e-rickshaw batteries.

The maximum load capacity of these vehicles is 4+1. The vehicle components are purchased from China and assembled in India. They are being sold under brands like Victory and Sagun.

A daily charge of 12 hours is required for a 100km run. These batteries are charged in households. Cost of charging is ~Rs 45-50. Maintenance is less than Rs 100/month. A driver typically makes Rs 250-300 daily (Rs 5 per passenger 12-15 trips daily).

At the time of exchange or replacement of the batteries from the vendor the owner gets Rs 6k discount.

Loan is provided by banks like PNB, which have a specific scheme for financing e-rickshaws, PNB Green ride. Loan is for a period of 33 months and after the first year, for the next 2 years, the bank provides 85% of replacement cost.

When purchased in cash, the payback period for an owner would be ~2 years while through the finance option (interest rate of 22% for 33 months) it could take a year or more to break-even.

The conventional auto rickshaws don't ply much in these cities any more (Haridwar, Roorkee, Meerut, Agra) and this trend will soon hit other regions of the country and could change the landscape of 3Ws.

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E-Rickshaw In Uttarakhand E-Rickshaw In Varanasi

Source: HDFC sec Inst Research Source: HDFC sec Inst Research

Assembled In India


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Auto ancillaries We met tyre and automotive lights distributors and were enthused by the rising popularity of their products.

Tyres The tyre market is largely dominated by MRF

(2W/CV/Tractor) and Apollo (4W).

Over the last few years, Ceat has focussed on five cities in Uttar Pradesh — Varanasi, Lucknow, Kanpur, Agra and Allahabad — where SUVs are used on tough rural roads, and tyres need regular replacement.

Ceat has 30% market share in Lucknow, and major OEM replacement sales come from MSIL, Hyundai, Tata Motors, Honda Activa, Honda bikes, Hero and Bajaj.

Distributors typically engage in retail sales too (~30% of the revenue mix).

Business fell by ~20% post demonetisation, but has picked up almost fully now.

We noticed that the replacement sales typically follow the OEM fitment trend. Tata Motors and Ashok Leyland vehicles use MRF, Apollo and Ceat tyres. In the bus category, the big players are MRF and Birla.

Ceat has similar pricing when compared to leaders like MRF and Apollo, and is gradually picking up pace. JK Tyre is also in line with Ceat. However, Ceat gives a guarantee of a 50% cut, (unconditional guarantee for upto 50% tread ware) and a five-year warranty.

Post the implementation of GST, July/August sales could fall, as dealers are not willing to stock inventory. Most OEMs are currently offering discounts to push inventory, with Ceat being the notable exception.

The tyre market in UP is expected to rise by 10-12%, with Ceat being the main beneficiary as per our inference.

Automotive lights (halogen bulbs) We met a Phoenix Lamps distributor (halogen

headlamps), who sells 6k bulbs a month (2W). The company has 40% market share in Lucknow. Its close competitors are Minda Industries and Osram.

592 is the highest-selling brand of Phoenix, and is used in HMSI and Hero motorcycles and scooters. Other OEMs also use this brand.

Halonix (Phoenix’s earlier name changed in 2013) is a strong brand, and is popular among retailers (consumer pull evident).

The distributor has witnessed 30-32% growth consistently in the last 12 years.

GST will be a big volume play for Phoenix, as the unorganised market is dominated by Chinese players, and the price differential is 7 to 8%. The distributor is confident of doubling his volumes once GST is implemented. This bodes well for the stock and its parent, Suprajit Engineering in the long term.

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Valuation matrix

Mcap (Rs bn)

CMP (Rs/sh) Reco TP

Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E

AUTOS Maruti Suzuki 2,286 7,568 BUY 8,478 242.9 272.4 353.3 31.2 27.8 21.4 21.9 19.0 14.5 23.2 22.4 26.3 Tata Motors 1,559 459 BUY 542 30.2 34.6 49.3 15.2 13.3 9.3 7.1 5.0 3.8 12.2 12.7 15.8 M&M 810 1,371 BUY 1,556 56.6 75.8 86.4 24.2 18.1 15.9 13.6 11.4 9.0 14.4 17.5 17.7 Bajaj Auto 807 2,789 BUY 3,296 132.3 146.7 165.6 21.1 19.0 16.8 15.2 12.4 10.7 26.1 23.9 24.3 Eicher Motors 760 28,056 BUY 31,934 624.3 804.9 1,010.0 44.9 34.9 27.8 32.8 25.9 20.9 39.4 38.9 39.3 Hero MotoCorp 749 3,751 NEU 3,740 169.1 182.1 208.0 22.2 20.6 18.0 15.2 13.9 12.2 35.6 33.9 34.8 Ashok Leyland 302 106 BUY 118 4.3 6.0 7.4 24.7 17.5 14.4 13.4 10.1 8.4 20.7 26.2 27.8 Force Motors 56 4,223 BUY 5,350 137.3 171.1 253.7 30.7 24.7 16.6 20.7 15.1 10.3 11.4 12.7 16.4 SML Isuzu 17 1,191 BUY 1,325 43.4 48.2 66.2 27.4 24.7 18.0 16.2 14.3 10.6 16.9 16.5 20.0 Atul Auto 9 422 BUY 528 17.7 26.2 31.1 23.8 16.1 13.6 13.4 9.4 7.8 23.1 28.5 27.7 AUTO ANCS Bharat Forge 261 1,121 NEU 1,014 24.8 31.0 40.0 45.3 36.2 28.0 20.2 17.5 14.3 15.6 17.5 19.6 Balkrishna Industries 164 1,696 NEU 1,414 74.0 89.2 101.0 22.9 19.0 16.8 14.6 12.0 11.0 29.9 30.6 30.1

Exide Industries 164 192 BUY 262 8.2 9.3 11.2 23.6 20.7 17.1 14.2 13.4 11.5 17.6 21.4 22.1 Endurance Tech 126 893 NEU 810 23.5 29.1 35.4 38.0 30.7 25.2 17.3 14.6 12.3 20.0 20.1 20.5 Suprajit Engg. 39 300 NEU 312 8.9 11.9 15.6 33.6 25.3 19.3 19.9 15.5 12.5 23.3 24.8 26.0 Jamna Auto 21 263 BUY 264 11.1 13.2 17.7 23.7 19.8 14.8 11.3 9.6 7.4 31.5 30.1 33.0 Ramkrishna Forgings 15 535 NEU 448 8.3 24.4 37.0 64.5 21.9 14.5 14.1 10.0 8.2 4.9 13.4 17.8

Subros 15 252 NR - 5.9 10.0 13.8 43.0 25.2 18.2 9.1 6.8 5.4 10.1 15.7 19.3 NRB Bearings 13 136 BUY 161 5.6 6.0 7.3 24.4 22.8 18.6 13.1 11.5 9.9 18.1 17.1 18.6 Lumax Auto 7 554 BUY 681 23.5 29.1 35.4 23.5 19.0 15.6 9.1 6.8 5.5 12.3 15.4 16.7 Source : Company, HDFC sec Inst Research

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CONSUMER We interacted with several distributors/dealers of FMCG/Appliances’ companies during our UP visit. We also had the opportunity of meeting managements of a few companies, and visited Havells’ and Patanjali’s plants. These interactions inspired confidence that while demonet impact is over, GST implementation issues will dominate over the next two to three months. Most of the dealers/distributors agreed that there will be long-term benefits after the implementation of GST.

There exists immense scope for growth acceleration in UP. The new government (with a notable majority) can improve drivers to increase income levels. This can lead to better consumption in UP in the coming years. Higher consumption with premiumisation can be the theme in UP in the coming years.

Recovery post demonet: Overall, consumer product recovered gradually across categories post demonetisation by Mar-17.

GST impact: During our UP visit, responses to queries revealed a largely positive outlook on GST, but only in the long run. For many companies, near-term challenges like retailer destocking could affect 1QFY18 performance. However, restocking is expected to have a positive impact on 2QFY18. Hence, 1HFY18 performance should be watched. Reactions to the 1-July-17 GST timeline were favourable. For most categories, Jun-Aug is a lean period; hence the quantum of business lost would not be substantial. It is positive that there is sufficient time before the start of the festive season.

No sign of structural growth: Apart from the recovery post demonet, we did not receive substantial feedback to support significant growth acceleration in any category/channel.

Channel destocking in FMCG: Most FMCG distributors are worried that their July sales will be affected, despite being prepared for GST. They expect many impediments in the initial days. With a view to help distributors, companies have promised them compensation for their unabsorbed GST-related losses on June-end inventory. Sales for June are already down 20-25%. July sales could possibly dip 30-50%, depending on the ease of GST implementation. Therefore, FMCG distributors have planned to reduce inventory levels by 30-50% during June-July. Distributors expect a gradual pick-up in sales starting August. Full channel stabilisation is expected over the next two to three months. Most expect no significant impact on consumer offtake, and restocking is expected to start in August.

Channel destocking in appliances: In appliances, retailers are offering discounts on old stocks (more than 6-month old inventory, largely outdated). At the retail level, old inventories constitute 5 to 7% of the total stock. Stocks old would not be eligible for ITC after 1-Jul-2017. Retailers are offering discounts on these products, and are negotiating with companies to compensate for unabsorbed losses owing to GST.

Better availability of electricity can boost long-term demand growth: Power cuts in UP have reduced significantly (~40-50%) over the last three years, and continue to improve. Sustainable stepping up of power availability is a positive for appliances, cables and wires, and meters.

Distribution reach: UP is the most populous state in India. The rural segment constitutes ~78% of the total population in UP, much higher than ~69% in India. Therefore, distribution reach is a key element in UP. We found Parle, Haldiram and Ghari are available in a majority of regions, including the interiors of UP.

Naveen Trivedi [email protected] 91-22-6171 7324

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Britannia’s presence was weak, a fact supported by the company.

Market share gain: We received positive feedback on RR Cable and Polycab in the Cables and Wire

category. In Fans, Anchor and Crompton are growing ahead of the others. In LED lamps, Panasonic and Havells are gaining market share, and so are Marico’s Shanti Amla and Saffola in FMCGs.

Categories Related Feedback Categories Feedbacks Cables & Wires We received positive feedback on RR Cable and Polycab in the Cables and Wire category. RR

Cables’ products quality and after sales services both are good. Polycab’s product quality is good but after sales services are not up to the mark.

Havells’ product quality and after sales services both are superior. But the price difference between Havells and RR Cables wire is ~7-8%.

Improving power availability has been creating an additional demand for cables. Fans

In Fans, Anchor and Crompton are growing ahead of others. Crompton has strong foothold in the fan market due to product quality, good after sales service and wide price range. However, we found few negative feedbacks for product quality at low price points.

Anchor fans are gaining traction at low price points. LED Lamps

In LED lamps, Panasonic and Havells are gaining market share. We found few negative feedbacks on Crompton’s LED lamps quality (replacement is high).

EESL’s LED lamps have lower lumens than those at the retail level. 9W LED lamp provides 850-900 lumens at the retail level, while EESL lamps’ lumens are lower by 25-30%. LED lamps’ price difference among players is marginal at the retail market.

Geyser Crompton’s geysers are growing ahead of the market. Product quality is superior. ACs Voltas is the market leader in air conditioners. However, growth in Daikin, Panasonic, Hitachi and

Lloyd was ahead of the market. Ogeneral’s VESTAR caters to the mass segment, and has performed well this summer. Window/Split AC ratio is shifting towards split ACs. Price difference between them ranges ~Rs

4,000-5,000. TV Panels LED TV panels of Samsung and Sony are gaining market share. Refrigerator LG and Samsung are leaders in the space. However, Whirlpool and Hitachi are also gaining share. Air Cooler Symphony is the leader in the branded air cooler market. It commands 50-55% market share at

the retail level. Symphony’s touch air cooler received strong consumer response. Summer was strong in April, but the impact of rainfall was felt in May and June. We found weak response for Voltas air coolers. Bajaj air coolers have no new additions in the last

3-4 years.

We received positive responses for Havells, RR Cables and Poly cab wires Anchor fans gaining traction in the value segment Panasonic and Havells are gaining market share in LED lamps AC market is shifting towards split ACs. Voltas is undisputed leader but brands like Daikin, Panasonic, Hitachi and Lloyd are also performing well We found positive responses for Symphony on product quality, consistent new launches and after sales services. Most retailers stated Symphony’s 50% market share

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Categories Feedback Washing Machine We found major players in washing machine are LG, Samsung, Whirlpool, Panasonic and IFB.

Top-load washing machines constitute 65-70% of the washing machine space. IFB is a strong player in the front-load segment. However, we found mix response on IFB’s top-

load washing machine. Stabilisers V-Guard’s stabiliser is a leader in the market, as both product quality and after sales services is

better than competitors. Crompton and Microtek stabilisers are also performing well. There is no price gap between V-

Guard and Microtek stabiliser. Hair Oil

Marico’s Shanti Amla & Parachute and Emami’s Kesh King are gaining market share in their respective markets.

Shanti Amla has ~45-50% market share, while Parachute commands 70-75% market share in UP in their respective markets.

Biscuit/Snacks

We found Parle and Haldiram products in a majority of the regions, including the interiors of UP. Britannia’s presence was weak, which was visible in the company’s performance in UP.

Detergent

Ghari has ~50% market share in the detergent segment in UP. Management plans to relaunch Uniwash (machine wash) in FY18.

Soaps

RSPL management plans to relaunch Venus soap Dettol and Lifebuoy liquid growth are in healthy double digits

Sanitary Napkins

Pro-ease (sanitary napkins) sales are witnessing sound growth. The product has a presence only in UP and Maharashtra. For sanitary napkins, management is focussing on the mass market, which is largely untapped.

Edible Oil

Saffola oil is gaining market share. Patanjali is also expecting strong demand in edible oil.

Baby Diaper MamyPoko is gaining market share. Face Wash He Face Wash has been receiving good consumer response Hair Colors Garnier commands ~55% market share in UP, while Godrej is second with 25% market share Paints Asian Paint commands 50% market share, followed by Berger with 30% market share and

Dulux. Asian Paints’ Apex and Ultima paints are key driving products Berger is strong in anti dust paint range Dulux’s velvet touch paint range is performing well

Major players in washing machine are LG, Samsung, Whirlpool, Panasonic and IFB

We found positive responses for Bosch and IFB in front load washing machines

Ghari detergent is king in UP with ~50% market share

Asian Paints is undisputed leader in UP

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Companies Related Feedback Companies Feedback Marico Marico’s UP business is ~Rs4bn, of which East UP contributes Rs 2.5bn and West UP Rs 1.5bn.

Around 20% difference between the market size and net revenue of the company. Marico’s June revenue can be down by 25-30%. However, we found positive feedback for

Marico’s medium to long term volume growth of 10-12% over the next two years Project Vikas Daud is very effective. Through this, Marico has added ~200-250 villages in the last

few years. Marico’s distributors work on ~25% RoI model. Marico agreed to pay for losses borne by the distributors on GST implementation. Distributors

are satisfied with Marico’s overall policy for distributors. Saffola oil and Saffola Masala Oats are gaining market share. Shanti Amla has ~45-50% market share in UP, while Parachute commands 70-75% market share.

Havells

Havells’ B-C business in UP has recovered mostly post the waning of the demonet impact. Many dealers/distributors have seen strong growth in Nov-Dec, owing to availability of the card swipe facility.

Havells’ B-B businesses in UP, especially for government projects, are witnessing slow growth post change in the state government. The business is affected by transition, and demand should return after 5-6 months. FY18 performance would be under pressure in UP.

Bajaj Electricals

Bajaj Electricals’ new strategy has not been effective. The company is closing business with existing dealers and distributors, and concentrating on 1 or 2 distributors, who would then supply to all dealers.

This would lower the dealers’ confidence in the company. The company wants low inventory at the retail level, and is focussing on quick supply from the distributors. This would be good, as the dealer/retailer would not have to hold high inventory, but Bajaj may lose shelf space at retail level.

In the new strategy, the distributor would not give any credit to dealers. We could not find positive feedback of Bajaj’s after sales services.

Marico’s many products gaining market share. Marico has effective expanded distribution network Havells growth from govt. projects is weak. Channel partners are very positive for company and sees immense scope of growth for Havells We could not receive positive response for Bajaj Electricals’ new distribution strategy

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Companies Feedback Emami

UP contributes ~Rs 4bn to Emami’s revenue for. Navratna and Boroplus combined contribute 50% to Emami’s revenue in UP.

Emami’s distributors work on healthy 20-25% RoI Boroplus, Kesh King and HE face wash are performing well Emami is gaining market share for Boroplus, Navratna Oil and Kesh King.

Nestle

Maggi noodles are consistently improving its growth rate, and most new variants have been receiving good consumer response.

Baby food growth rate has slowed down. Overall, Nestle is performing well. Top management has been very aggressive post the Maggi

noodles ban. Bata

Bata has been very aggressive in the last 2-3 years, with many new launches. Product range has improved for both men and women. Various products for women have been

launched in a wide price range. Price range for Hush Puppies also touched ~Rs 8000. Bata is ready for GST implementation.

Unicharm (India)

Unicharm Corporation (Japanese company) sells brands like MamyPoko (Baby Diapers), Sofy (Sanitary napkins) and Lifree (Absorbent pants) brands in India.

MamyPoko and Sofy are both gaining market share in UP. MamyPoko’s pack of 1 diaper has been very successful, and contributes 65-70% to its diaper sales. Diaper in pants has been launched by MamyPoko.

V-Guard

V-Guard’s stabiliser is a leader in the market, as both products and services are better than competitors.

Dabur Dabur’s oral care products are growing at a healthy pace and gaining market share. Dabur honey is gaining market share

Hamdard

Increasing demand for ayurvedic products have been supporting Hamdard’s products (Safi, Rooh Afza & Roghan badam shirin).

Growth has accelerated in Hamadard’s products in the last two years. Hamdard posted ~Rs 6bn revenue in FY16.

Safi (~Rs 1bn revenue), a natural blood purifier, is growing in high double digits, and has no significant competition in this space.

Rooh Afza (~Rs 3bn revenue) is the flagship product of Hamdard, and it is also growing at a healthy pace. Rooh Afza commands ~45% market share.

At present, about half of Hamdard’s revenues come from North India, primarily Uttar Pradesh, Punjab and Haryana.

Emami’s many products are performing well in UP

Nestle’s Maggi is growing well, but baby food is slow

Bata’s aggression on new launches has increased

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Companies Feedback

Rohit Surfactant Private Ltd. (Ghari Detergent)

We met management of Ghari Detergent (Rohit Surfactant Private Ltd). The company posted ~Rs 45bn revenue in FY17, a 5% fall YoY as demonet impacted Nov-Dec revenue by 35-40%.

Revenue recovered during Jan-March, and the company registered ~10% growth. T The company expects ~5% drop in revenue in 1HFY18, and ~15% revenue growth in 2HFY18. . Of the Rs 45bn revenue, Ghari Detergent contributed Rs 41bn (75% powder/25% bar), Venus

soap Rs 800mn (down 50%) and Xpert Rs 1700mn (down 16%). Management is bullish about Ghari’s long-term prospects, and expects healthy double-digit

growth over the next two to three years. Ghari has ~50% market share in the detergent segment in UP. Management plans to relaunch Venus soap and Uniwash (machine wash) in FY18. Pro-ease (sanitary napkins) sales are witnessing sound growth. The product has a presence only

in UP and Maharashtra. For sanitary napkins, management is focussing on the mass market, which is largely untapped.

The company is setting up a soda ash plant (capex of Rs 30bn) for backward integration of the detergent business. As of now, the company buys soda ash from Nirma and Tata Chemicals.

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Havells plant visit The Haridwar fan plant meets 90% of Havells’

requirements. The remaining 10% fans are imported from China.

Havells’ fan plant has two units. Unit 1 started in 2005-06 and Unit 2 in 2010-11 (still has excise benefits).

The total capacity for ceiling fans is 700,000/month, and TPW is 125,000/month. Havells has manufactured ~6mn fans in FY17. Peak production takes place during Dec-May. July-Aug is lean months, with only 50% capacity utilisation.

Havells has cut production in June by ~30%, owing to pre-GST destocking in distribution channels.

Patanjali plant visit This plant commenced production in 2009, and

covers an area of 260 acres. It has ~12,000 employees (4,000 permanent and the rest on contract). Patanjali’s in-house/out-sourced mix is 75/25%. This ratio is expected to be 70/30% in FY18.

Patanjali has ~8,000 distributors as of now vs. 6,000 a year ago. Management plans to increase this to 12,000 distributors by FY18. Open market (GT, Patanjali stores) contribute 70% to the revenue, while CSD & MT contribute 30%. Patanjali sells goods on a cash basis. The distributor carries a 30-day inventory, and the retailer a 15-day inventory. The distributor’s margin is ~5% and retailer’s is 12-15%.

Management expects that apart from mainstream products, all new products like Power Vita, baby products and edible oil would witness strong growth in FY18. Management is confident of achieving Rs 200bn revenue in FY18. Patanjali had achieved Rs 105bn revenue in FY17.

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Story in charts

Brands we found in the interiors of UP



Parle, Haldiram and Ghari has very strong distribution reach in UP. We found these brands even in the interior parts of UP Lots of scope of expansion for Britannia in UP

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We found Coca-Cola and Pepsi products more often but surprised to see less visibility of Mango Sip

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Retail appliance market in UP



We found appliances market in many parts of UP was well organised. Few retail chains like Value Plus, Sahu agencies, Initiative and Sadana Electronics for large home appliances

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We found various high end categories and premium brands at retail stores

In refrigerators, premium brands and high end products are performing well. We found healthy premium product mix even in the traditional stores

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We found positive responses for Bosch and IFB in front load washing machines

AC market is shifting towards split ACs. Voltas is undisputed leader but brands like Daikin, Panasonic, Hitachi and Lloyd are also performing well

We received positive responses for Symphony’s recent launched ‘Touch Pad Air Cooler’

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We were encouraged by strong distributors’ feedback for Havells’ product quality, after sales service and policy for distributors

Anchor gaining traction in fan market

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Valuation matrix

Company MCap (Rs bn)

CMP (Rs) Reco. TP (Rs)

EPS (Rs) P/E (x) EV/EBITDA (x) Core RoCE (%) FY17P FY18E FY19E FY17P FY18E FY19E FY17P FY18E FY19E FY17P FY18E FY19E

ITC 4,009 330 BUY 351 8.6 9.8 11.0 38.3 33.7 30.1 24.7 21.8 19.4 36.2 38.4 39.6 HUL 2,366 1,093 BUY 1,200 20.0 23.6 28.3 54.7 46.4 38.6 36.6 31.0 26.4 63.5 73.3 80.7 Dabur 530 301 BUY 311 7.2 8.2 9.4 41.5 36.8 31.9 33.9 30.8 26.6 46.6 48.9 55.1 Britannia 443 3,692 BUY 3,720 73.7 88.6 105.3 50.1 41.7 35.1 34.4 28.0 23.5 43.6 43.4 51.0 Marico 413 320 NEU 342 6.3 8.0 9.7 50.9 40.2 33.0 35.7 29.1 24.2 43.3 51.0 62.4 Colgate 294 1,079 NEU 1,038 21.2 26.2 31.5 50.9 41.2 34.3 30.7 24.9 21.2 57.2 65.5 82.1 Emami 241 1,060 BUY 1,278 24.3 29.9 36.5 43.6 35.5 29.0 32.2 26.6 22.3 16.4 22.0 29.7 Jub. Food 72 1,090 NEU 995 10.2 19.0 24.9 106.7 57.5 43.8 28.8 22.0 17.9 11.6 19.3 28.2 Havells 321 480 NEU 495 9.7 11.6 14.7 47.4 39.7 31.4 34.7 25.0 20.7 36.6 31.0 27.3 Crompton 144 224 BUY 244 4.7 5.7 7.0 48.0 39.3 32.1 29.2 24.4 20.5 40.4 51.1 60.4 V-Guard 77 182 NEU 195 3.6 4.5 6.0 51.0 40.3 30.2 35.5 29.9 23.1 27.6 29.6 34.9 Source : Company, HDFC sec Inst Research

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Cement : Waiting to be unleashed We drove across UP in mid June, visiting Varanasi, Gorakhpur, Faizabad, Ayodhya, Lucknow, Kanpur, Agra and Meerut. During the course of the trip, we interacted with cement market participants, farmers, bureaucrats and cement companies. Our key takes on the cement sector are listed below.

Near-term demand sag visible, long-term positive: Demand is likely to remain depressed in the near term, driven by multiple factors like GST, the overloading ban and sand shortage. Most large infrastructure projects (ex-Varanasi and Lucknow) are in their planning stages, and will not deliver incremental cement demand in the next 12 to 18 months. However, the broader picture remains upbeat, with the new government in UP (enjoying central government support) driving expectations of an uplift in macros.

GST concerns led to destocking: Concerns on stock transfer provisions drove de-stocking across the state, during second half of June. This was mostly on expected lines. Most market participants expect to migrate smoothly to the new system, and indicated

system readiness. (Our follow-up checks post the Yatra also indicated the same)

Sand availability: Improvement only after festive season: New mining leases have been allotted, but improvement in the supply of sand is likely only after the monsoon, given restrictions on mining during this season. Further, allottees have to comply with NGT norms before they can commence mining.

Overloading restrictions are here to stay: With the CM making pothole-free roads a key deliverable, we do not expect any let up in the anti-overloading drive. More than cement, this has impacted other construction materials (sand, aggregates), as these have overloaded aggressively, to achieve low delivered prices.

Trade prices firm, non-trade wilts: Prices across UP in the trade category remain firm (Rs 300-330/bag across cities), even in the competitive markets of Western UP. However, non-trade prices are much lower (between Rs 235-250/bag). We sense that pressure is likely to continue till the festive season commences.

Companies

Reco TP Takeaway Comment

ACC SELL Negative Market shift towards non-trade to hurt. ACC’s brand premium eroding (UltraTech’s entry to weigh further), dealer attrition noticeable.

UltraTech SELL Positive Acquisition of the strong Jaypee franchise, along with the UltraTech brand premium to boost UP operations.

Birla Corp BUY Positive Perfect (acquired from Reliance) commands a premium in some markets. Coupled with incentives, this should drive strong growth


Ankur Kulshrestha [email protected] +91-22-6171 7346 Meera Midha [email protected] +91-22-6171 7334

Average cement prices across regions Rs/50kg Jun- May- MoM Jun- YoY North 301 302 (0.2) 300 0.4 South 348 365 (4.6) 340 2.5 East 304 324 (6.0) 290 4.9 West 330 328 0.6 276 19.5 Central 313 314 (0.4) 303 3.1 India 319 327 (2.2) 302 5.8

Stock price performance Change (%) 1M 3M 1Yr UltraTech 0.8 2.8 20.0 Shree 1.4 4.1 16.3 Ambuja 8.6 2.5 -2.1 ACC 2.0 10.8 2.1 Ramco -0.6 5.5 19.5 Birla Corp -5.2 16.1 58.9 Orient -2.2 6.0 -11.4 Sanghi 9.6 28.0 27.6 Deccan 2.6 0.1 9.4

Rating and recommendations Rating TP CMP

UltraTech SELL 3,380 4,151 Shree SELL 14,565 18,401 Ambuja SELL 200 255 ACC SELL 1,300 1,651 Ramco NEU 690 709 Birla Corp BUY 1,005 875 Orient NEU 165 155 Sanghi BUY 98 90 Deccan BUY 1,468 1,175

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Uttar Pradesh: Lay of the landOne of the largest cement consuming states UP is India’s second-largest cement consuming state (after Maharashtra), based on industry estimates. It consumes ~2.8-3.0 mT/m (~35 mTPA (~12.5% of domestic demand). Of this, Western UP (relatively more affluent) would account for ~45%, while Central and Eastern UP would account for 55% of the total.

Despite the largest cement footprint, UP remains one of the lowest cement consuming states on a per-capita basis (~171kg vs national average of 231kg).

UP does not have a large clinker capacity (except UltraTech’s Dalla and Super in the Eastern corner of the state). It procures most of its clinker from two sources. The Satna cluster supplies to Eastern and Central UP, while markets in Western UP are supplied to by Rajasthan-based plants.

Given its vast geographic expanse and external supply of clinker/cement, the market profile varies from region to region. ACC dominates the relatively IHB-heavy Central and Eastern UP markets, while UltraTech and Shree Cement dominate the more mature Western UP markets.

The profile of cement consumption has started changing, as an increasing number of infrastructure projects are being taken up, and readymade real estate preference picks up. Some of these markets have increased their tilt towards non-trade, and this is likely to accelerate in the future

Uttar Pradesh Cement Dynamics

Source: Industry, HDFC Sec Inst Research

Most UP markets have higher cement prices as compared to other markets, given that (a) Cement is supplied from outside states and (b) IHB and trade-dominated nature of the market. ACC remains the brand with the highest recall, and this drives its premium (~Rs 20-30/bag) in Eastern and Central UP.

There are some mini-grinding units in Bihar and NCR too, which supply cement based on clinker from other sources. However, these are small in both scale and impact on the markets.

Satna Cluster plants supply to Eastern and Central UP

Western UP is supplied from Rajasthan based plants

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City-wise takes Varanasi (Eastern UP) Varanasi has a cement market size of ~55kT/month (peak of 65kT/m), mostly PPC, and is driven by IHB demand (70%). It is a high-priced market (ACC sells for Rs 330/bag, others not below Rs 290/bag), implying strong profitability for cement makers in the area (ACC, Jaypee/UTCEM, Heidelberg, BCorp and Prism). Government’s focus on infrastructure, with visible execution of projects, indicates strong cement demand growth in the future. Lower availability of sand (though better than the rest of UP owing to Bihar proximity) and GST adoption weigh on demand in the near term.

Area: 1,535 Sq km Population (2011): 3,676,841 Literacy (2011): 75.6%

Key projects: Ring road, Airport Connector, Desilting of Varuna and Assi, Waterfront development

Source: Census 2011,HDFC Sec Inst Research

Market size

While Varanasi itself is a small city, the district consumes ~50-55 kT/m (65kT/m at peak). ACC (~30% market share) and Jaypee (~20%) are the largest in terms of market share, followed by Mycem (~14%), MP Birla Group (including Reliance now, ~10%), Prism (10%) and other Satna brands (KJS, Maihar).

Pricing Structure (Rs/bag, Mid June) ACC 330 Mycem 315 Others 290 Note: Wholesale Pricing Indicated

A few grinding units are present at the Bihar border (Kanoria- rented by Dalmia) and Eco (partially rented by Prism).

Trade-non trade mix stands at 70-30%, while OPC is hardly used. IHB accounts for ~70% of the mix (lower than five years ago).

Key projects and growth

Strong growth expected, given the pipeline and current execution. Key ongoing projects include roads to other cities (Lucknow, Azamgarh, Gorakhpur), a ring road and an Airport connector (all of them four-lane roads with shoulder). Varuna and Assi rivers are being desilted, and waterfronts are being developed.

Pace of construction is visible everywhere. From the airport to the centre of the city, ongoing work like road to airport (four-lane with side roads), ring road (similar), sewers etc can be seen. The airport road flyover looks similar to the one in Mumbai, with precast sections being assembled offsite (now routine). Inside the city, several roads are dug up and are being reworked.

Estimated demand growth numbers thrown at us varied from 12% to 30%. Given the small existing size of the project pipeline and strategic importance, Varanasi should outperform.

GST preparedness and impact

Most dealers are ready for GST. Some destocking is happening, owing to switchover provisions. However, this cannot be generalised, and we encountered instances where stock levels were normal.

Concerns on GST include requirement of TIN, etc. for retailers, and the limit on cash transactions of Rs0.2 million. The latter can act as a demand dampener, as transactions after the wholesaler typically entail cash.

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Impact of UltraTech’s acquisition of Jaypee

UltraTech will likely price at a premium to ACC, and is not being perceived as a threat to market stability. This is the ‘home market’ for Jaypee, and commands reasonable pricing and premium. It is likely that half the sales promoters will switch to UltraTech, which will also recruit new dealers.

Sand mining issues

Sand and aggregates are problematic, given the absence of clarity on mining leases. However, sand is available from Bihar, and the material is being sourced for IHB sectors from there. There is still a slowdown in infrastructure works, owing to non-availability of local sand.

Gorakhpur (Eastern UP) Gorakhpur (including neighbouring Maharajganj) has a cement market size of ~85-90kT/month (G’kpur – 55kT/month), mostly PPC, and driven by IHB demand (90%). Projects like AIIMS, the fertiliser plant and metro are likely to drive cement demand growth of 15-20%. However, currently there is little happening on the ground. UltraTech can take over the entire market share of Jaypee, as the latter is likely to concentrate its remaining capacities on Varanasi and neighbouring regions. We see positive read-throughs for both UltraTech (much better EBITDA vs Jaypee owing to pricing) and Birla Corp (strong branding for Perfect) from this trip to Gorakhpur.

Area: 3,483 Sq km Population (2011):3,769,456 Literacy (2011): 43.3%

Key Projects: AIIMS, Fertilizer plant, Metro Rail

Source:Census 2011,HDFC Sec Inst Research

Market size

Gorakhpur is the largest city in North-East UP. The cement market (85-90 kT/month) is usually clubbed with the Maharajganj district in the North. Most cement companies have warehouses in Gorakhpur for servicing Maharajganj too. All numbers henceforth include Maharajganj. The Gorakhpur district consumes ~55kT/month.

ACC has the largest market share (~25- 30%), followed by Jaypee, Century (Birla Gold) and MP Birla Group (Perfect, Samrat and Ultimate) (~15% each). Others players include Prism (Champion), Heidelberg (mycem) and Ambuja Cement (mostly rake based). Mycem is marginal now, but making its presence felt.

Pricing Structure (Rs/bag, Mid June) ACC 350 Birla Gold 325 Others 310 Note: Wholesale pricing indicated

Non-trade prices in the area are at Rs 230-235.

Non-trade volumes estimated at ~10kT (~11%) of the market, equally split between government and organised real estate. There is hardly any OPC being sold here.


Gorakhpur will get an AIIMS, a fertiliser plant and a metro. All these were announced before the new government came in, but mostly at the drawing-board stage. The city will also see the construction of over-bridges, adding to the demand.

There are high expectations from Yogi, but very little happening on the ground. Market participants expect growth of the usual 5-7%, likely to jump up to 15-20% when the project’s execution starts.

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Market participants aver that they are GST ready. No destocking seen here.

Impact of UltraTech’s acquisition of Jaypee: Jaypee may likely withdraw entirely from these markets, and concentrate on its core markets around Varanasi, given the fact that it will be left with very little capacity once UltraTech takes over.

The Bara (4 mTPA) GU will not be ready, and it is understood that Jaypee will hand over Chunar (2.5 mTPA) near Varanasi to UltraTech in the interim.

UltraTech will likely price close to ACC. ACC dealers insist that UltraTech will not be able to command ACC’s pricing, and will compete with Perfect.

Sand mining and overloading

Demand is subdued currently, owing to restricted sand availability in most parts. We understand that the sand mining leases have been allotted, and the sand situation may improve soon.

Proper loading is being enforced, and most market participants think this is likely to be the norm. Expect increase of 30-40% of freight for most market participants.

Lucknow (Central UP) Lucknow has a cement market size of ~1.8-2 lakh T/month, >50% of which comes from the non-trade segment. It is a highly fragmented market, with a large gap in trade and non-trade pricing (~Rs 50 currently). Volumes are under pressure owing to sand mining issues, and may continue to remain so till October. As such, the market may decline in FY18, though things may recover once the sand shortage eases. Not many government projects are ongoing (except Lucknow Metro with an estimated consumption of 5kT/month).


Key Projects: Metro, Cricket stadium (completed)


Market size

Lucknow consumes ~2 lakh tonnes/month. It is a highly fragmented market: MP Birla Group (~15-17%), Heidelberg, Prism and ACC (~12-15% each) and Jaypee (10-12%).

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Cement Prices In Lucknow

Pricing Structure (Rs/bag, Mid June) ACC 320 Others 295 Note: Wholesale pricing indicated

Non-trade prices at Rs 235.ACC, which typically never sold in NT, has started doing volumes there.

Trade-non trade mix at 45-55%, while OPC is barely used.

Key projects and growth Except for the Metro and cricket stadium (nearly

complete now), there are no other large government projects on the anvil.

Lucknow’s demand has suffered from sand shortage, and market participants estimate a decline of ~25-30% from the historical norm.

GST preparedness and impact Costs of compliance may be an issue for smaller

traders. Key concerns are on the availability of trained personnel for GST compliance. Destocking is

ongoing, and is likely to intensify further as June-end nears.

Impact of UltraTech acquisition of Jaypee

Jaypee may not have much presence in the Lucknow market once UltraTech takes over. However, pricing may be an issue, given that Jaypee sold most volumes in the lower price category here.

Sand mining issues

Sand mining leases (six months duration) have been allotted recently. However, the allottees need to have NGT clearance before mining commences.

UP laws prohibit sand mining between July and September. Hence, an allottee with a sand mining approval will be able to mine only in October.

Apart from Eastern UP, where sand is available from Bihar, the rest of the state may continue to suffer from sand shortage.

Kanpur (Central UP) Kanpur’s (both Nagar and Dehat) cement market size is~60kT/month (of which 35-40kT/month is from Kanpur city). The market is mainly dominated by ACC, followed by other small players.

Area: 3,155/3,021 Sq km Population (2011): 4,581,268/1,796,184 Literacy (2011): 79.7%/75.8%

Key Projects: Metro (Planned)

Source: Census 2011 (Both Nagar and Dehat),HDFC Sec Inst Research

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Market size

Kanpur City has a surprisingly small market of 40k T/month, with ACC capturing almost half, followed by Jaypee, Prism, Mycem and Birla Gold. Including the adjoining Kanpur Dehat district, the total consumption is 60 kT/month

Cement Prices In Lucknow

Pricing Structure (Rs/bag, Mid June) ACC 320 Jaypee 290 Prism 290 Others 280

Non-trade wholesale prices are in the range of Rs 230-240.

Trade-non trade mix is at 75-25%, and use of OPC is minimal in the market.


Apart from a Metro (in the planning stage) and the Kanpur-Delhi expressway, not many infrastructure projects are in the pipeline. A terminal decline in traditional industries (textiles, and now tanneries)

weighs on the prospects of long-term cement demand here.

Our interactions suggest government infra push to be the only likely source of demand growth

Shortage of sand has led to a temporary hiatus in construction activity in the region. It is likely that the resumption of supplies will lead to an increase in demand.

Agra (Western UP) Agra’s cement market size is ~60 kT/month, ~30% of which comes from the non-trade segment. UltraTech (25-30%) and Shree Cement (25-30%) dominate the trade here at the upper and lower end of the price spectrum. Demand has suffered owing to successive shocks of demonetisation and sand unavailability. Large projects are mostly in the planning stage, and the demand is likely to remain soft, driven by traditional IHB activity.


Key Projects: Ring Road, Kanpur Delhi E-way, Metro


Market size Agra consumes ~60 kT/month. It also acts as a

forwarding centre, as cement comes from Rajasthan and MP. As such, ~1.5 lt/month arrivals (mainly on rakes) are routed to Mathura, Kasganj, Etah and Hathras.

UltraTech (25-30%) and Shree Cement (25-30%) dominate the trade here at the upper and lower end of the price spectrum. Other brands between them bring out the remaining 40%, the largest being Mycem.

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Pricing Structure (Rs/bag, Mid June) Ultratech 310 ACC 310 Ambuja 310 Mycem 280 JK Lakshmi 280 Binani 280 Shree 265

Non-trade prices in Agra are at Rs 230-235.

Trade-non trade mix at 2530%, OPC is hardly used. IHB accounts for ~60-70% of volumes, while government drives ~20-25% and builders account for ~5% currently.


DPR for the Metro was submitted by the previous government, but there is no clarity on its current status. Other projects in the pipeline include Taj Amusement Park and 6-lane Delhi Kanpur expressway, but none of these are currently at or near the execution stage.

As such, demand growth likely to remain soft.


Wholesalers’ margins may get impacted, as they earlier paid only VAT (16.5%), while now they will be charged 28% on their gross profits.

Destocking is ongoing, but market participants believe they are ready for GST.

Impact of UltraTech acquisition of Jaypee Jaypee has small footprint in Agra. This is expected to

be subsumed by UltraTech, as most dealers have been given the option of becoming UltraTech retail counters.

Sand mining issues Sand shortage is a problem. Prices have shot up 3x

(Rs 22/cu.ft to Rs 75/cu.ft). While leases have been allotted, there is no clarity on when supply will normalise. Sand from other states is available at high cost.

Meerut (Western UP) Meerut is a large market (~50-60kT/month), with rapid urbanisation driving consumption. Economic activity is also influenced by proximity to NCR and a large industrial footprint (sports goods, musical instruments etc). Sand shortage and GST have weighed on prices.


Key Projects: Metro, Cricket stadium (completed)


Market size Meerut has a market size of 55-60kT/month.

UltraTech (~20%) and Shree Cement (~20%) dominate the markets, with JK Cement and Ambuja also having a strong presence.

Pricing Structure (Rs/bag, Mid June) Ultratech 325 ACC 325 Ambuja 325 Others 295

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Non-trade prices are much lower than trade prices in Meerut at ~Rs 260

Trade-non trade mix at 25-30%. Little OPC is sold here.


Owing to its proximity to NCR, Meerut is undergoing rapid urbanisation (metro-isation), with many malls coming up. It is also a large sports goods producer, which is a significant contribution to its economy.

Demand has been hit by sand shortage, although prices here are softer than other parts, owing to availability of sand from Rajasthan and Haryana.

Market participants estimate a 5-10% decline this year.

GST preparedness and impact Wholesalers have registered in the new system, but

many retailers whose business was largely in cash are still not fully aware. However, there are expectations that things will settle down in a couple of months.

Destocking may further intensify as the GST deadline approaches

UltraTech – Jaypee Impact It is expected that the Jaypee network will move

completely to UltraTech.

Valuation matrix

Company MCap (Rs bn)

CMP (Rs) Reco. TP

(Rs) P/E EV/EBITDA EV/Tonne (US$) RoE (%)

FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E Ultratech Cement 1,153.2 4,199 SELL 3,380 27.2 23.7 13.8 12.8 215 221 16.4 16.1 Shree Cement 655.7 18,819 SELL 14,565 55.1 35.9 23.5 16.2 272 248 15.7 20.4 Ambuja Cement # 521.0 263 SELL 200 38.1 27.0 15.5 11.5 172 165 17.4 21.8 ACC Ltd # 320.6 1,704 SELL 1,300 27.1 18.7 14.5 10.6 142 138 12.6 17.6 Ramco Cements 169.5 712 NEU 690 23.2 21.0 14.0 12.3 208 200 18.1 17.3 Birla Corp 70.9 920 BUY 1,005 39.9 26.8 12.7 10.9 119 113 5.3 7.5 Orient Cement 32.2 157 NEU 165 43.7 14.8 11.5 8.3 72 68 5.8 13.1 Sanghi Industries 20.4 93 BUY 98 12.1 7.6 6.6 4.6 93 83 14.0 18.9 Deccan Cements 8.1 1,157 BUY 1,468 17.4 13.3 6.9 5.1 54 50 15.2 17.1 Source : Company, HDFC sec Inst Research

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INFRASTRUCTURE Awas Bandhu Awas Bandhu was formed in 1997 as an apex institution under the Housing and Urban Planning Dept. The main objective of the body is to oversee the performance of the housing sector, and coordinate activities of subordinate department/agencies, viz. Town & Country Planning Dept U.P. Development Authorities and U.P. Housing & Development Board.

The real estate sector has been hit hard post demonetisation, and also the clampdown on black money. Private developers continue to face a liquidity crunch, with RERA making things even more difficult.

The UP Govt expects to build 500k houses under PMAY by 2022, with a Rs 0.3mn/unit price point and 250 carpet.

UP has a population density of 800 persons/sqkm vs 200 persons/sqkm in MP. Land acquisition is a problem, hence construction in urban areas will have to be vertical.

PPP key for creating affordable stock, as the UP govt will increase FSI from 2.5 to 3.5 in exchange for housing stock. Private developer meetings will be called this month to educate them about FSI incentives.

Over 2 lakh houses under EWS were built in the last five years. Awas Bandhu expects another 5 lakh units to come up over the next five years, with participation from private developers, driven by FSI incentives.

We also met Mukul Singhal – Secretary Housing, UP Government. He echoed similar views, and stated a

target of 10 lakh affordable houses to be built over the next five years.

The Housing Secretary expects affordable housing projects to pick up by Dec-17.

Lucknow Metro Rail Corporation We met Kumar Keshav, MD of Lucknow Metro Rail Corporation. Lucknow’s Metro Phase I contracts have been awarded. The Transport Nagar to Charbagh stretch is expected to be operational in Jul-17.

The Charbagh to Munshipulia stretch will be operational by 2019.

As of now, Phase 1 has achieved 43% progress and 48% physical progress. There are no major time or cost overruns, which is creditable. The total project cost has been pegged at Rs 66 bn.

Phase 2: The East-West corridor DPR is now being upgraded by DMRC, with a project cost of Rs 70 bnand length of 12km. LMRC expects to award the project by mid-2018, if all goes well.

Phases 3 and 4 of the Lucknow Metro would each cost Rs 160bn/35km, and are in the DPR stage.

Kanpur and Varanasi are other cities an immediate focus on metro projects. These will have predominated at Rs 150bn for each, with the Kanpur Metro being 35km and Varanasi 29km.

Civil works in the Lucknow Metro constitute ~50% of the project cost. LMRC gives a 10% interest-free advance, with deductions starting from 20% to 80% of the project’s financial progress.

Parikshit Kandpal [email protected] +91-22-6171 7317

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80% of the payments are being made within three days of bill submission. We sensed an urgency to adhere to project deadlines.

Mr Keshav was worried about the re-imposition of 100% excise duty and 100% customs duty on construction and other equipments for the Lucknow Metro. He believed that this would increase costs, making it incrementally difficult to service loans and interest expenses.

UP Expressways Industrial Development Authority We met UPEIDA Secretary, Awanish Awasthi

80% financial and physical progress has been achieved in the Lucknow-Agra expressway. The central carriageway has been completed. Side roads -60%, afforestation-15%, and drains-5% have been completed. Toll Plaza/Traffic management/Automation is yet to be completed.

Of the total project cost of Rs 94.50bn, ~Rs 70bn has been spent.

Toll collection will commence from 1-Nov-17. Expected annual toll revenue is pegged at Rs 372-380cr, of which ~60-70% will be realised in the first year.

A toll contractor will be appointed for five years initially.

Purvanchal Expressway – Lucknow Ballia Expressway project cost is now pegged at Rs 135 bn. UPEIDA has already tied up for Rs 35bn loan from HUDCO, and 53% land has been acquired vs 27% three months ago.

The sand mining ban has been lifted, and will reduce the project cost by Rs 15 bn.

UPEIDA is also bidding for a toll project of Rs 15 -20bn under BOT.

Early completion bonus of 6% will be included in the Purvanchal Expressway, as UPEIDA believes in rewarding contractors for speedy execution. We believe that an early completion bonus will be paid for the Lucknow-Agra Expressway too.

The bid will not have the condition of ‘Prior Access Controlled Expressway Experience Clause’. This shall help increase the number of bidders and also competition.

The Bundelkhand expressway will be executed by NHAI now, as UPEIDA does not have the financial wherewithal to execute any new projects on EPC, besides the Purvanchal Expressway.

UP Power Secretary We met Alok Kumar, Power Secretary of UP

He emphasised the need to improve operational efficiency to deliver 24*7 power. This includes (1) Metering (2) Energy audits (3) Stopping power thefts and (4) Improving collections.

UDAY implementation in the state will be completed by Mar-19.

T&D losses are high (the Yogi Adityanath regime inherited 40%+ run rates in most areas, which have since come down), and would require investments. The total investment is pegged at Rs 700bn over the next two years. Extension of the grid would cost Rs 25 bn.

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Feeder separation will be attempted for agri pump and home use in pilots across the state.

No more long-term PPAs will be signed, as the UP Govt already has sufficient purchase commitments. If T&D losses fall sufficiently, no new PPAs will be signed over the next two to three years.

Transmission losses have already reduced to 30% vs 40-45% earlier. Going forward, Kumar said the Govt was aspiring to bring this down to 18-19%.

He hinted at a massive overhaul (technical and managerial) to provide 24*7 electricity in UP over the next twelve months. The core issue is metering and collection, failing which there is a clear understanding that bankruptcy will be the end result. Currently, UP is losing 66 paise on every unit.

Out of total 380mn units/day generation, approximately 8-10mn units/day will be from renewable sources.

Lucknow Agra expressway: Global quality Concrete highway stretch (Gorakhpur to Ayodhya)

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