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Equity Research

January 23, 2019


ICICI Securities Limited
is the author and India Update
distributor of this report
Contents
Page 2 Asian Paints (Rs1,407): All-round beat Hold
Market data as on Jan 22, 2019
Page 4 Sun Pharma (Rs419): Management acts to assuage concerns Buy
INDICES
% chg Page 5 Shree Cement (Rs15,918): Strong beat, price improvement remains key Buy
(DoD)
BSE Sensex 36445 (0.4) Page 7 ICICI Prudential (Rs345): Trying hard to rediscover its Midas touch Buy
S&P CNX Nifty 10923 (0.4) Page 9 Havells India (Rs711): Strong growth; tad disappointment on margins Hold
BSE 100 11174 (0.2)
BSE 200 4641 (0.2) Page 11 TVS Motor (Rs554): Realisation surprise reflective of growth quality Buy
Page 13 Alembic Pharma (Rs590): Beat led by US & ROW, India remains weak Add
OVERSEAS MARKETS#
% chg Page 15 Just Dial (Rs481): Strong all-round execution Buy
(DoD)
Dow Jones 24404 (1.2) Page 17 Media sector: Mayday for Indian pay-TV
Nasdaq Comp. 7020 (1.9) Page 18 Aviation sector: December traffic growth remains modest
S&P 500 2633 (1.4)
Hang Seng 27005 (0.7) Page 19 Oil&Gas weekly: OMCs: Marketing margins may drive strong Q4FY19 EPS growth
Nikkei 20515 (0.5)
Page 21 Results date reckoner
ADVANCES/DECLINES (BSE) Page 22 Recent reports/updates
Group A B S
166 269 488
Highlights
Advances
Declines 256 752 645
Unchanged 7 24 138
Sector/ event Impact
FII TURNOVER (BSE+NSE)* Asian Paints (APNT) reported strong 24% YoY consolidated revenue
(Rs mn)
PAINTS:
Bought Sold Net Asian Paints growth to Rs52.9bn in Q3FY19, beating our estimate of 17% growth.
49,410 40,910 8,500
– Q3FY19 Standalone revenues grew 26% YoY driven by high double-digit decorative
NEW HIGHS AND LOWS (BSE) results review paint volume growth led by festive sales. Differential in value and volume
Group A B S and earnings growth is estimated to be slightly lower than the aggregate effective price
High 2 5 40
Lows 24 73 114 revision hikes of ~6% for Q3FY19 due to change in product mix towards faster
growing low-value products. However, this reverses the instance of
CURRENCY negative realisation observed in Q2FY19. While margins declined on a YoY
US$1 = Rs71.44
basis, they improved sequentially on price hikes and softening raw material
*FII turnover (BSE + NSE) as on prices. Gross margin declined 127bps YoY to 41.0% (up 116bps QoQ) and
Jan 21, 2018
EBITDA margin declined 122bps YoY to 19.7% (up 280bps QoQ).
Consolidated EBITDA grew 17% YoY to Rs10.4bn while PAT grew 15%
YoY to Rs6.4bn, beating our estimate of Rs6.2bn, on higher-than-expected
revenue growth.
APNT remains on track to commission the first phase of its new plant at
Vizag in Q4FY19. Earlier, the company commissioned its plant at Mysuru in
Sep’18. We expect higher depreciation and employee expenses on
commissioning of the new plant in Vizag. Incorporating robust revenue and
earnings growth in Q3FY19, we increase our earnings estimates by 2.8% /
1.6% / 1.3% for FY19 / FY20 / FY21. We maintain HOLD with a revised
target price of Rs1,380 (earlier Rs1,355). At CMP, the stock is trading at a
P/E of 45.1x Sep’20E earnings.
Market movement over last fortnight Volumes in Rs mn (BSE and NSE) Advances & Declines ratio (BSE)
11200 320,000 1.6
37000 BSE (LHS) NSE (RHS) BSE NSE
11000 1.4

240,000 1.2
36500 10800
1.0
10600 160,000
36000 0.8
10400
0.6
35500 80,000
10200 0.4

35000 10000 0 0.2


10/1 12/1 14/1 16/1 18/1 20/1 22/1 10/1 12/1 14/1 16/1 18/1 20/1 22/1 10/1 12/1 14/1 16/1 18/1 20/1 22/1

ICICI Securities Limited, ICICI Centre, H.T. Parekh Marg, Churchgate, Mumbai – 400 020, India.
Phone: +91 22 2298 2460/70 Fax: +91 22 2298 2448
ICICI Securities Inc, 275 Madison Avenue - Suite 1417, 7th Floor, New York, NY 10017
United States. Tel: 212-388-0677
India Update, January 23, 2019 ICICI Securities

Asian Paints (Hold) PAINTS


Q3FY19 RESULTS REVIEW AND EARNINGS REVISION
All-round beat Rs1,407
Nimit Shah (+91 22 6637 7588) nimit.shah@icicisecurities.com
Manoj Menon (+91 22 6637 7209) manoj.menon@icicisecurities.com
Rahil Jasani, CFA (+91 22 6637 7650) rahil.jasani@icicisecurities.com

Target price Rs1,380 Asian Paints (APNT) reported strong 24% YoY consolidated revenue growth to Rs52.9bn
in Q3FY19, beating our estimate of 17% growth. Standalone revenues grew 26% YoY
Earnings revision driven by high double-digit decorative paint volume growth led by festive sales. Differential
(%) FY19E FY20E FY21E in value and volume growth is estimated to be slightly lower than the aggregate effective
Sales ↑ 2.1 ↑ 2.1 ↑ 2.1 price hikes of ~6% for Q3FY19 due to change in product mix towards faster growing low-
EBITDA ↑ 4.4 ↑ 3.5 ↑ 2.6
value products. However, this reverses the instance of negative realisation observed in
PAT ↑ 2.8 ↑ 1.6 ↑ 1.3
Q2FY19. While margins declined on a YoY basis, they improved sequentially on price
Target price revision hikes and softening raw material prices. Gross margin declined 127bps YoY to 41.0% (up
Rs1,380 from Rs1,355 116bps QoQ) and EBITDA margin declined 122bps YoY to 19.7% (up 280bps QoQ).
Consolidated EBITDA grew 17% YoY to Rs10.4bn while PAT grew 15% YoY to Rs6.4bn,
beating our estimate of Rs6.2bn, on higher-than-expected revenue growth.
APNT remains on track to commission the first phase of its new plant at Vizag in Q4FY19.
Earlier, the company commissioned its plant at Mysuru in Sep’18. We expect higher
depreciation and employee expenses on commissioning of the new plant in Vizag.
Incorporating robust revenue and earnings growth in Q3FY19, we increase our earnings
estimates by 2.8% / 1.6% / 1.3% for FY19 / FY20 / FY21. We maintain HOLD with a
revised target price of Rs1,380 (earlier Rs1,355). At CMP, the stock is trading at a P/E of
45.1x Sep’20E earnings.
Table 1: Valuation summary
Y/E EPS P/E EV/E
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 1,407 FY18 20.5 68.5 42.2 M.Cap. (Rs bn) 1,349
52 wk Range (Rs) 1468/1102 FY19E 23.2 60.6 37.6 M.Cap (US$ bn) 18.9
Dividend yield FY19E (%) 0.8 FY20E 28.4 49.5 30.6 Shares Out (mn) 959.2
BSE Sensex 36445 FY21E 34.0 41.4 25.7 Free Float (%) 47.2
Source: Company data, I-Sec research

 High double-digit decorative paint volume growth: In Q3FY19, APNT reported


stupendous standalone revenue growth of 26.4% YoY to Rs45.4bn driven by high
double-digit decorative paint volume growth. Volume growth was robust across
regions and product categories driven by festive season. Distemper continues its
higher growth rate (on a YoY basis) as observed in Q2FY19, which could have
marginally impacted realisation. Hence, due to change in product mix, the differential
in value and volume growth would be slightly lower than the aggregate effective price
hikes of ~6% for Q3FY19 (1.4% in Mar’18, 2.0% in May’18 and 2.4% in Oct’18).
However, this reverses the instance observed in Q2FY19 when APNT reported lower
value growth as compared to volume growth due to mix change and increased
rebates on GST rate transition.
 Gross margin declines YoY; softening crude to provide respite: Consolidated
gross margin declined 127bps YoY to 41.0% (up 116bps sequentially) due to raw
material price pressure. However, crude oil prices corrected recently, down 30%
currently from the high of US$75 in Oct’18. Combined with the price hikes taken in
Q3FY19 (2.35% in Oct’18, 1.70% in Dec’18), we expect improvement in gross margin
from FY20. EBITDA margin declined 122bps YoY to 19.7% (up 280bps QoQ) and
resultant EBITDA grew 17% YoY to Rs10.4bn.

2
India Update, January 23, 2019 ICICI Securities
 Maintain HOLD with revised target price of Rs1,380 (earlier Rs1,355):
Incorporating robust revenue and earnings growth in Q3FY19, we increase our
earnings estimates by 2.8% / 1.6% / 1.3% for FY19 / FY20 / FY21. We maintain
HOLD with a revised target price of Rs1,380 (earlier Rs1,355). We value the stock at
a triangulated average of P/E (Rs1,436 at 46x Sep’20E EPS), DCF (Rs1,318:
assuming WACC of 10.2% and terminal growth of 5.0%), and MCap/Sales (Rs1,384:
5.5x Sep’20E net sales). At CMP, the stock is trading at a P/E of 45.1x Sep’20E
earnings.

Table 2: Q3FY19 consolidated financial performance


Rs mn Q3FY19 Q3FY18 % YoY Q2FY19 % QoQ
Net revenues 52,940 42,605 24.3 46,391 14.1

Raw materials 31,250 24,610 27.0 27,924 11.9


% of sales 59.0 57.8 127 bps 60.2 -116 bps
Employee costs 3,226 2,711 19.0 3,073 5.0
% of sales 6.1 6.4 -27 bps 6.6 -53 bps
Other expenditure 8,034 6,373 26.1 7,553 6.4
% of sales 15.2 15.0 22 bps 16.3 -111 bps
Total expenditure 42,510 33,693 26.2 38,549 10.3

EBITDA 10,430 8,912 17.0 7,842 33.0


EBITDA margin (%) 19.7 20.9 -122 bps 16.9 280 bps
Other income 452 497 (9.0) 633 (28.6)
PBDIT 10,882 9,408 15.7 8,475 28.4
Depreciation 1,154 896 28.8 947 21.8
PBIT 9,728 8,512 14.3 7,527 29.2
Interest 148 92 60.6 121 22.0
PBT 9,580 8,420 13.8 7,406 29.4
Tax 3,263 2,913 12.0 2,427 34.5
% of PBT 34 35 (1.6) 33 3.9

PAT before ass. & MI 6,317 5,507 14.7 4,979 26.9


Share of profit from
associates 154 165 (6.7) 81 91.3
Minority interest 116 126 (8.1) 132 (12.8)
Extraordinary - - n.m. - -
PAT 6,356 5,546 14.6 4,928 29.0
Adj. PAT 6,356 5,546 14.6 4,928 29.0
EPS (Rs) 6.6 5.8 14.6 5.1 29.0
Source: Company data, I-Sec research

Details in our report ‘All-round beat’ dated January 23, 2019.

3
India Update, January 23, 2019 ICICI Securities

Sun Pharmaceuticals Industries (Buy) PHARMA


COMPANY UPDATE
Management acts to assuage concerns Rs419
Sriraam Rathi (+91 22 6637 7574) sriraam.rathi@icicisecurities.com
Vinay Bafna (+91 22 6637 7339) vinay.bafna@icicisecurities.com

Target price Rs571 Sun Pharmaceutical Industries (Sun Pharma) has announced (Press release) several
steps and clarifications for alleviating some of the investor concerns over the recently
Target price revision raised corporate governance issues in media articles. We believe that these steps would
Rs571 from Rs628 help in restoring investor confidence to some extent. Nevertheless, we expect valuation
multiple to remain under pressure in near term until clarification emerges on potential SEBI
investigation (as requested by Sun Pharma). In light of these recent developments we
reduce our target P/E multiple from 22x to 20x which is in line with other peer companies.
We maintain our BUY rating with a target price of Rs571/share (earlier Rs628/share).
Table 1: Valuation summary
Y/E EPS P/E EV/E
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 419 FY18 14.0 29.9 17.7 M.Cap. (Rs bn) 1,005
52 wk Range (Rs) 677/391 FY19E 17.5 24.0 14.0 M.Cap (US$ bn) 14.1
Dividend yield FY19E (%) 0.6 FY20E 23.5 17.9 10.8 Shares Out (mn) 2,399.3
BSE Sensex 36445 FY21E 28.6 14.7 8.8 Free Float (%) 45.6
Source: Company data, I-Sec research

Following steps were undertaken:


 Change in auditor of subsidiary companies: The company has initiated steps to
induct S R B C & CO LLP, its statutory auditors, as auditors of subsidiaries replacing
Valia and Timbadia (audit firm).
 Transfer of distribution of domestic business from Aditya Medisales to a wholly
owned subsidiary: Aditya Medisales Ltd (AML) became related party from FY18 due
to consolidation of shareholding of investment companies. In order to accommodate
and assuage investor concerns, the company will be transferring the distribution from
AML to a wholly owned subsidiary of the company from Q1FY20 onwards, post
receipt of all regulatory approvals.
 Loans to Employees/Others reversed: The company in its annual report FY18
reflected an amount of Rs22.4bn in Loans and Advances. The company has clarified
that this liability was in respect of Atlas Global Trading (Atlas) assuming the damages
on account of Protonix patent litigation settlement entered by Sun Pharma in FY14
that was disclosed in the annual report of FY14. Delay in resolution of Halol facility
resulted in supply constraints, which led to non-adherence of the agreed supply
schedule by the company with Atlas. The company has funded Atlas towards non-
fulfillment of its supply agreements until the obligations are met as per agreement.
The company and Atlas have now reached a settlement wherein Atlas will assign its
rights and obligations to a wholly owned subsidiary of the company thereby
concluding the transaction in the books of the company. This transaction is expected
to complete in FY19.
 The company has confirmed that neither loans nor guarantees have been provided in
any form to Suraksha Realty.
 Whistleblower’s complaint to SEBI: The company reiterated that they have not
received any confirmation on this. However, the company has requested the regulator
to examine the matter in entirety.
Details in our report ‘Management acts to assuage concerns’ dated January 22,
2019.
4
India Update, January 23, 2019 ICICI Securities

Shree Cement (Buy) CEMENT


Q3FY19 RESULTS REVIEW AND EARNINGS REVISION
Strong beat, price improvement remains key Rs15,918
Krupal Maniar, CFA (+91 22 6637 7254) krupal.maniar@icicisecurities.com
Dharmesh Shah (+91 22 6637 7480) shah.dharmesh@icicisecurities.com

Target price Rs19,300 Shree Cement (SRCM)’s Q3FY19 EBITDA (ex-forex gain of Rs200mn) up 30% YoY to
Rs6.9bn was better than our/street estimates owing to better margins in cement and
Earnings revision* strong performance in power segment. Reported cement realisation increased 1.1% QoQ
(%) FY19E FY20E FY21E (vs our estimate of 0.5% QoQ), while cement EBITDA/te was up 6% YoY to Rs1,066/te (I-
Sales ↓ 2.1 ↓ 5.9 ↓ 6.3 Sec: Rs1,029/te). Power segment revenues more than doubled YoY with EBITDA of
EBITDA ↑ 2.9 ↓ 2.3 ↓ 3.1 Rs576mn (I-Sec: Rs410mn) vs EBITDA loss of Rs52mn YoY. Most key variable input
EPS ↑ 9.3 ↓ 3.3 ↓ 4.3
*consolidated
costs are down by 10-15% from their recent highs and benefit of the same would largely
accrue Q4FY19 onwards. We believe SRCM with its unique low-cost model would be able
Target price revision to outperform peers both on volume and profitability front across business cycles. We
Rs19,300 from Rs19,000 marginally tweak our FY19-21E EBITDA by 2-3% and revise our target price to
Rs19,300/share (earlier Rs19,000/share) based on 15xDec’20E EV/E on quarterly roll-
over. Maintain BUY. SRCM remains our preferred pick in the sector.
Table 1: Valuation summary
Y/E EPS P/E EV/E
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 15,918 FY18 386 41.3 22.1 M.Cap. (Rs bn) 555
52 wk Range (Rs) 19047/13511 FY19E 318 50.0 18.6 M.Cap (US$ bn) 7.8
Dividend yield FY19E (%) 0.3 FY20E 492 32.4 14.7 Shares Out (mn) 34.8
BSE Sensex 36445 FY21E 610 26.1 12.0 Free Float (%) 35.2
Source: Company data, I-Sec research

 Revenue increased 21% YoY to Rs27.8bn (I-Sec: Rs27.3bn): Cement revenues


increased 16% YoY to Rs25.6bn. Cement plus clinker volumes increased 11% YoY to
5.93mnte owing to >30% YoY growth in East region and higher clinker sales.
Reported realisation increased 4.4% YoY to Rs4,315/te (I-Sec: Rs4,289/te) on better
than expected pricing in its key markets of East regions, especially Bihar.
Management is focusing on increasing trade volumes in North region which may
augur well for realisation/margins. With improving industry utilisation across both its
key markets of North and East regions, management expects pricing to improve.
 Adjusted cement EBITDA increased 18% YoY to Rs6.3bn: Total cost/te of cement
increased 4% YoY/declined 2% QoQ to Rs3,248/te (I-Sec: Rs3,260/te). Raw material
plus power & fuel cost/te increased 17% YoY largely on increase in petcoke and coal
prices, while freight cost/te declined 2% YoY. Other expenses/te stood flat YoY while
declining 11% QoQ on lower repairs & maintenance and stores & consumables. It also
included MTM forex gain of Rs200mn on external commercial borrowings, which we
have factored in other income. PAT increased by 3% YoY to Rs3bn (I-Sec: Rs2.4bn).
 Power segment registered EBITDA of Rs576mn (I-Sec: Rs410mn) with per unit
EBITDA at Rs1.29/p.u. Power segment revenues more than doubled YoY to Rs2.2bn.
Power sales generation increased 63% YoY to 446MU while power realisation
increased 32% YoY/10% QoQ to Rs4.96/unit.
 We factor ~13% standalone volume CAGR over FY19E-FY21E and expect
EBITDA/te to increase from Rs958/te in 9MFY19 to Rs1,171/te by FY21E.
 Expansions on track; industry-leading volume growth to continue: SRCM
commissioned clinker section of 3mnte integrated cement plant in Karnataka in
Dec’18. Besides, it plans to commission 2.5mnte and 3mnte (assuming 100% PSC)
grinding units in Jharkhand and Odisha by Jun’19 and Sep’19 respectively. SRCM has

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India Update, January 23, 2019 ICICI Securities
acquired additional limestone mines in Chhattisgarh and can add an additional clinker
line in 12-15 months whenever required. Also, it plans to commission 2mnte grinding
unit in Pune by Sep’20.
 SRCM has declared an interim dividend of Rs25/share. The record date is fixed at
30th Jan’19.

Table 2: Q3FY19 earnings review (standalone)


(Rs mn)
I-Sec %
Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%) estimate Variance
Net sales 27,806 23,027 20.8 25,866 7.5 27,324 1.8
Net volumes 5.93 5.33 11.4 5.64 5.2 5.94 (0.1)
Cement realisations 4,315 4,132 4.4 4,268 1.1 4,289 0.6

Raw materials 2,050 1,569 30.6 1,707 20.1 2,012 1.9


Personnel costs 1,666 1,466 13.6 1,700 (2.0) 1,730 (3.7)
Power and fuel 6,591 5,055 30.4 6,143 7.3 6,254 5.4
Freight and selling 6,513 5,948 9.5 6,143 6.0 6,401 1.7
Other expenses 4,087 3,696 10.6 4,439 (7.9) 4,408 (7.3)
Total expenses 20,906 17,734 17.9 20,133 3.8 20,806 0.5

EBITDA 6,901 5,293 30.4 5,733 20.4 6,518 5.9


EBITDA/te (blended) 1,163 994 17.0 1,016 14.4 1,098 5.9

Interest 593 207 185.9 1,458 (59.3) 600 (1.2)


Depreciation 3,361 2,100 60.0 3,295 2.0 3,460 (2.9)
Other income 753 873 (13.7) 514 46.6 765 (1.6)
PBT 3,700 3,859 (4.1) 1,494 147.6 3,224 14.8

Extraordinary
- 403 (1,477) -
income/(expense)
Taxation 687 928 (26.0) (476) (244.2) 806 (14.8)
Reported net income 3,013 3,333 (9.6) 493 510.8 2,418 24.6
Recurring net income 3,013 2,930 2.8 1,970 52.9 2,418 24.6

% Margins bps bps bps


EBITDA 24.8 23.0 183 22.2 265 23.9 96
PAT 10.8 12.7 (189) 7.6 322 8.8 199
Source: Company data, I-Sec research

Details in our report ‘Strong beat, price improvement remains key’ dated January
23, 2019.

6
India Update, January 23, 2019 ICICI Securities

ICICI Prudential Life Insurance (Buy) INSURANCE


Q3FY19 RESULTS REVIEW AND EARNINGS REVISION
Trying hard to rediscover its Midas touch Rs345
Abhijit Tibrewal (+91 22 6637 7230) abhijit.tibrewal@icicisecurities.com

Target price Rs460 A closer look into the broader life insurance sector suggests that not much has changed in
terms of the interplay between the private life insurers and the public behemoth Life
Earnings revision Insurance Corporation of India (LIC). YTD the industry new business premiums (including
(%) FY19E FY20E FY21E group yearly renewable) were up ~1% while the private sector premium growth was ~23%
Net Total in the same period. Essentially, LIC has continued to lose market share to the privates.
premium ↓ 7.2 ↓12.2 ↓16.6
While some of the closest peers of ICICI Prudential (IPRU) have exhibited strong new
VNB ↓12.8 ↓16.1 ↓16.1
EV ↓ 0.9 ↓ 2.0 ↓ 3.1 business premium (NBP) growth in 9MFY19, IPRU still finds itself limping at best.
Table 1: Valuation summary
Target price revision
Y/E EPS P/E P/BV
Rs460 from Rs580
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 345 FY18 11.3 30.6 7.2 M.Cap. (Rs bn) 495
52 wk Range (Rs) 455/307 FY19E 8.2 42.0 6.6 M.Cap (US$ bn) 6.9
Dividend yield FY19E (%) 1.0 FY20E 8.3 41.7 6.1 Shares Out (mn) 1,435.8
BSE Sensex 36445 FY21E 8.2 42.1 5.6 Free Float (%) 21.3
Source: Company data, I-Sec research

ICICI Prudential Life Insurance reported a Value of New Business (VNB) margin in
9MFY19 at 17% (down 50bps QoQ, up 330bps YoY, although the second comparison is
flattered by changes in tax rate assumption). This was attributed to the increase in
expense ratio assumptions used in the computation of VNB, which again was due to weak
growth in the NBP. Absolute VNB grew at 18.6% in 9MFY19. APE for the nine-months
was however down 4.2% while for the quarter it was down 2.1% YoY (ULIP products down
~9% has been particularly worrisome). While the volatility of the capital markets because
of multiple external factors like high crude prices, tariff war etc. have contributed to a
slowdown in the ULIPs, IPRU’s miseries seem to have been compounded by the fact that
it has a disproportionate proportion of ULIPs in its product mix and the average ticket size
of its ULIP policies is ~Rs0.18mn which targets the affluent segment of customers. These
affluent customers have either deferred their investments in ULIPs or have taken
preference for some other financial savings instrument. Recently, in November, IPRU
even introduced the monthly payment option for its ULIP offering. Reported APE for the
months of October-December did show an improving trend. While it’s too early to tell how
this will play out, IPRU is trying earnestly to resurrect itself and make good of the turf it has
conceded to its peers.
Protection business constituted 8.6% on an APE mix basis, up from 4.1% a year back.
This mix trend which is margin accretive, along with; (i) increased focus on growing the
savings APE & (ii) expected revisions to higher bucket persistency assumptions, remain
key to the margin expansion thesis. Protection APE grew at a healthy ~100% in 9MFY19
and demonstrates the strong focus in the segment.
All said and done, the recovery is going to play out slowly. If the last quarter is anything to
do by, IPRU is slowly beginning to find its feet. So as a discerning investor, one would
need to be patient. We expect this company to have a steady state RoEV of ~17%,
assuming a steady state 13M persistency of ~80-82% (moving marginally higher or lower
based on capital market confidence). In light of the slow recovery in NBP growth, we have
cut our FY20-FY21E net premium estimates by 12-16%. We have also cut our FY19-
FY20E VNB margins by 50bps each. Consequently, our EV estimates for FY20-FY21E are
down by 2-3%. At the current trading multiple of 2.1x FY20E P/EV we find the stock to be
attractive. We also reduce our 1-yr fwd target multiple to 2.5x P/EV (from 3.3x earlier).

7
India Update, January 23, 2019 ICICI Securities
This when applied to Q3FY21E EV/share yields our 12M TP of Rs460 (from Rs580). We
maintain our BUY recommendation.
Table 2: Q3FY19 result review – Revenue & P&L Account
(Rs mn, year ending March 31)
YoY QoQ
Growth Growth
Q3FY18 Q2FY19 Q3FY19 (%) (%)
Gross Premium Income 68,556 76,819 75,664 10.4 -1.5
(i) First Year Premiums 19,339 18,394 16,438 -15.0 -10.6
(ii) Renewal Premiums 45,390 51,027 50,071 10.3 -1.9
(ii) Single Premium 3,827 7,399 9,154 139.2 23.7
Reinsurance Ceded 605 807 834 37.9 3.4
Net Premium Income 67,951 76,012 74,830 10.1 -1.6

Income from Investments 65,442 12,278 10,478 -84.0 -14.7


Other Income 175 186 195 11.3 4.6
Contribution from Shareholder's
Account - -208 981 - -
Total Income 1,33,568 88,269 86,483 -35.3 -2.0
Benefits Paid 46,852 35,014 33,245 -29.0 -5.1
Change in Valuation Liability 72,602 38,833 38,663 -46.7 -0.4
Commission Paid 3,773 3,951 3,671 -2.7 -7.1
Operating expenses 5,211 6,585 5,785 11.0 -12.2
Provision for Bad & Doubtful Debts
/ Diminution in investment values 1,521 1,600 1,574 3.4 -1.6
Total Expenses 1,29,959 85,982 82,938 -36.2 -3.5
Surplus before tax 3,609 2,287 3,545 -1.8 55.0
Tax expense 237 284 291 23.0 2.5
Surplus After Tax 3,372 2,003 3,254 -3.5 62.5
Less: Funds for Future
Appropriation 631 524 593 - 13.0
Transfer to Shareholders Funds 2,742 1,479 2,662 -2.9 80.0

Income from Investments 2,160 1,426 1,382 -36.0 -3.1


Other Income 2 5 2 - -62.5
Total Income 4,904 2,909 4,046 -17.5 39.1

Operating Expenses 93 85 90 -3.5 6.1


Contribution to Policyholder's
Account - -208 981 - -

Profit Before Taxes 4,810 3,032 2,975 -38.2 -1.9


Tax 289 24 8 -97.4 -68.4
Profit After Tax 4,521 3,009 2,968 -34.4 -1.4
Source: Company data, I-Sec Research

Details in our report ‘Trying hard to rediscover its Midas touch’ dated January 23,
2019.

8
India Update, January 23, 2019 ICICI Securities

Havells India (Downgrade to Hold) MID-CAP


Q3FY19 RESULTS REVIEW AND RECOMMENDATION CHANGE
Strong growth; tad disappointment on margins Rs711
Vikash Mantri (+91 22 6637 7161) vikash.mantri@icicisecurities.com
Abhishek Bohara (+91 22 2277 7637) abhishek.bohara@icicisecurities.com

Target price Rs686 Havells India (Havells) reported strong top-line growth of 28% on the back of 29% and
22% YoY growth in core business and Lloyd, however strong growth failed to translate in
Earnings revision to profitability. All segments witnessed strong growth largely led by volume growth. Overall
(%) FY19E FY20E EBITDA margin was impacted by commodity price inflation, rupee depreciation and delay
Sales ↑ 3.9 ↑ 4.2 in passing on increased costs to customer; impact was higher in ECD segment.
EBITDA ↓ 6.1 ↓ 3.5
PAT ↓ 5.9 ↓ 4.0 Management outlined positive growth outlook in medium term on the back of improving
demand scenario and expects improvement in margin with stabilising commodity prices.
Target price revision We tweak our estimates to factor in strong revenue growth and lower margins in near
Rs686 from Rs631 term, resulting in downward earnings revision by 6% and 4% for FY19 and FY20. After
recent increase in share price we downgrade Havells to HOLD with revised DCF-based
FY20 target price of Rs686 (Rs631 earlier).
Table 1: Valuation summary
Y/E EPS P/E EV/E
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 711 FY18 11.2 63.4 40.5 M.Cap. (Rs bn) 445
52 wk Range (Rs) 725/488 FY19E 13.6 52.2 34.1 M.Cap (US$ bn) 6.2
Dividend yield FY19E (%) 0.8 FY20E 17.6 40.3 26.3 Shares Out (mn) 625.5
BSE Sensex 36445 FY21E 21.6 32.9 21.6 Free Float (%) 40.5
Source: Company data, I-Sec research

 Strong volume growth across segments: Havells witnessed strong volume led
growth across segments, while only cable segment witnessed yield improvement (6-
7%). Cable and switchgear segments witnessed 31% and 21% YoY growth
respectively aided by government’s electrification and infrastructure initiatives. ECD
segment revenue grew 34% YoY with relatively stronger growth in small appliances
(festive season) and water heaters (market share gain). Lighting segment (ex EESL
and B2G business) witnessed 18% growth despite 25-30% volume growth as pricing
pressure continued owing to declining input cost.
 LED TV led growth in Lloyd: Lloyd segment revenue grew 22% YoY in Q3FY19,
largely driven by growth in LED TV owing to festival season. AC business also
witnessed some growth though largely driven by higher realisation as volume growth
remains under pressure due to high channel inventory. EBITDA margin of Lloyd
segment contracted 120bps YoY to 1.7% owing to higher input cost and unfavourable
currency movement. Management expects its new AC plant to get operationalised by
April 2019.
 Volatile commodity prices and delay in price hike led to margin contraction:
Despite strong top-line growth (28%), EBIDTA grew only 12% as margin contracted
160bps YoY to 11.7% impacted by higher raw material cost. Employee cost and other
expenses also witnessed sharp increase as company is investing in both capacity and
capabilities (R&D) to sustain strong growth. Contribution margin for ECD segment
was impacted the most due to delay in passing higher input cost to consumer.
Management expects improvement in margins in coming quarters with commodity
prices stabilising.

9
India Update, January 23, 2019 ICICI Securities
Table 2: Havells India – Q3FY19 result summary
(Rs mn)
Standalone Dec-18 Dec-17 Sep-18 % chg YoY % chg QoQ
Revenue grew 28% Total revenues 25,184 19,658 21,910 28.1 14.9
with 29% and 22%
growth in core Havells Expenditure 22,239 17,036 19,285 30.5 15.3
Cost of revenues 15,751 11,863 13,519 32.8 16.5
and Lloyd business. Employee costs 2,108 1,625 2,034 29.7 3.7
Other expenditure 3,465 2,761 2,991 25.5 15.8
A&P expenses 915 786 741 16.4 23.4
Commodity price EBITDA 2,946 2,622 2,625 12.3 12.2
inflation and adverse Other income 331 278 343 19.1 (3.7)
forex movement Depreciation 353 363 391 (2.7) (9.8)
Finance Expenses 36 55 37 (35.2) (2.7)
impacted gross
margins. PBT 2,888 2,692 2,540 7.3 13.7
Exceptional items - 210 - NM NM
Less: Provision for Tax 931 748 754 24.5 23.4
Adjusted PAT 1,957 1,734 1,786 12.9 9.5

Operating margin (%) 11.7 13.3 12.0 -164 bps -28 bps
Gross margin (%) 37.5 39.7 38.3 -219 bps -84 bps
Effective tax rate (%) 32.2 27.8 29.7 445 bps 255 bps
NPM (%) 7.8 8.8 8.2 -105 bps -38 bps
Source: Company data; I-Sec research

Details in our report ‘Strong growth; tad disappointment on margins’ dated January
22, 2019.

10
India Update, January 23, 2019 ICICI Securities

TVS Motor Company (Buy) AUTO


Q3FY19 RESULTS REVIEW AND EARNINGS REVISION
Realisation surprise reflective of growth quality Rs554
Nishant Vass (+91 22 2277 7260) nishant.vass@icicisecurities.com
Tushar Sharma (+91 22 2277 7649) tushar.sharma@icicisecurities.com

Target price Rs716 Although TVS Motor Company (TVSM)’s Q3FY19 operational performance missed our
estimates, it was better than consensus expectations. The key highlight of the result was
Earnings revision(S/A) ASP growing 6% YoY and 3% QoQ to Rs47.1k per vehicle, beating our estimate by 2%.
(%) FY19E FY20E The ASP growth was driven by price hikes and an improved product mix. Gross margin
Sales 0.0 ↓ 0.2 missed our estimate by 50bps due to high raw material costs, and was the key reason for
EBITDA ↓ 4.9 ↓ 2.4
PAT ↓ 13.0 ↓ 7.7 EBITDA margin miss vs our estimate. Other expenses grew only 2% YoY despite TVSM
delivering 20% YoY volume growth. We believe this is a demonstration of how TVSM’s
Target price revision pull-led demand strategy and cost-cutting initiatives (like value analysis/engineering) can
Rs716 from Rs772 help keep its fixed costs under control and aid margin expansion.
Table 1: Valuation summary
Y/E EPS P/E EV/E
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 554 FY18 14.0 37.5 20.0 M.Cap. (Rs bn) 263
52 wk Range (Rs) 720/495 FY19E 19.7 26.7 12.9 M.Cap (US$ bn) 3.7
Dividend yield FY19E (%) 0.9 FY20E 29.1 18.0 10.1 Shares Out (mn) 475.1
BSE Sensex 36445 FY21E 32.5 16.2 9.2 Free Float (%) 42.6
Source: Company data, I-Sec research

 Brands, scale & product mix to drive ASP growth: TVSM’s blended ASP growth
continues to surprise positively and remains a key tenet to our positive thesis. It is
driven by an improving model mix (higher share of Jupiter/Ntorq 125cc scooters along
with Apache motorcycles) as well as recent price hikes to offset increased commodity
costs. According to the management, raw material costs are likely to decline in
Q4FY19 and FY20. TVSM has strong localisation plans on the vendor side as well to
reduce raw material import content.
With TVSM pursuing a pull-based demand strategy and cost-cutting initiatives, we
expect fixed expenses to remain in control. The combination of ASP growth, reducing
raw material costs and in-control fixed expenses could lead to higher EBITDA per
vehicle and the long-awaited operating margin expansion.
 Key takeaways from earnings call:
a) Management expects Q4FY19 to be better than Q3FY19 for the industry. The retail
finance situation has improved. b) TVSM maintains inventory of 4-5 weeks. c) Price
hike of ~0.9% has been taken in FY19YTD. TVSM also took a price hike of ~Rs300
per vehicle in January 2019. d) TVSM plans to launch new electric products in FY20.
e) The outlook for export markets remains stable with FX and availability of USD
stable in those markets. Export revenue in Q3FY19 was Rs10.6bn with USD/INR
realisation of 71.5 (69.5 in Q2FY19). f) From January 2019, Radeon sales can move
to ~20k per month and NTorq sales can move to ~25k per month.
 Maintain BUY: We continue to expect TVSM to deliver strong volume growth on the
back of its strong brands. We also see a strong margin growth opportunity for TVSM
on ASP growth and cost control; we estimate EBITDA margin to expand to 12.5% in
FY20E. With 32% EPS CAGR in FY18-21E, TVSM is our top pick in the sector. We
maintain our BUY rating and continue to value TVSM’s standalone business at 25x
FY20E EPS (Rs678/share) and TVS Credit Services at 2x FY18 P/B (Rs37/share)
leading to our SoTP-based target price of Rs716/share (earlier Rs772/share).

11
India Update, January 23, 2019 ICICI Securities
Table 2: Q3FY19 result review (standalone)
(Rs mn)
Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%)
Volumes (units) 989,787 826,285 19.8 1,088,374 (9.1)
Realisation (Rs/unit) 47,121 44,597 5.7 45,880 2.7
Total operating income 46,640 36,850 26.6 49,935 (6.6)
Raw material costs 35,347 26,783 32.0 37,840 (6.6)
Employee costs 2,367 2,118 11.7 2,449 (3.4)
Other costs 5,169 5,081 1.7 5,363 (3.6)
Total operating expenditure 42,883 33,982 26.2 45,653 (6.1)
EBITDA 3,757 2,868 31.0 4,282 (12.2)
EBITDA Margin (%) 8.1% 7.8% 27 bps 8.6% -52 bps
Depreciation 1,012 824 22.8 1,016 (0.4)
Other Income 7 182 (96.4) 7 (12.2)
Interest 167 122 37.1 212 (21.1)
PBT 2,585 2,104 22.9 3,062 (15.6)
Exceptional Items - - -
Tax 801 560 42.9 949 (15.6)
Adjusted PAT 1,784 1,544 15.6 2,113 (15.6)
Source: Company data, I-Sec research

Details in our report ‘Realisation surprise reflective of growth quality’ dated


January 22, 2019.

12
India Update, January 23, 2019 ICICI Securities

Alembic Pharma (Add) PHARMA


Q3FY19 RESULTS REVIEW AND EARNINGS REVISION
Beat led by US & ROW, India remains weak Rs590
Sriraam Rathi (+91 22 6637 7574) sriraam.rathi@icicisecurities.com
Vinay Bafna (+91 22 6637 7339) vinay.bafna@icicisecurities.com

Target price Rs656 Alembic Pharma (Alembic) reported Q3FY19 results better than expectation due to one-
time supply opportunity in few products in US and strong growth in ROW. Revenue grew
Earnings revision 21.2% YoY to Rs10.2bn (I-Sec est. Rs9.4bn), Adj. profit grew 30.0% YoY to Rs1.7bn (I-
(%) FY19E FY20E FY21E Sec est. Rs1.0bn) and EBITDA margin improved 140bps YoY to 23.8% (I-Sec est. 18.5%).
Sales 4.0 0.2 0.1
EPS 17.6 (0.4) (0.7) R&D expenditure stood at 11.0% of sales which would remain stable going forward. US
witnessed QoQ decline of 26.5% on a high base of Q2FY19 but short term opportunities
Target price revision aided revenue beating our estimate. India business grew a tepid 4.6% YoY on a high base
Rs656 from Rs660
(inventory correction post GST implementation), though secondary sales data remain
strong. We raise our revenue estimates by 4.0% and earnings estimates by 17.6% for
FY19 to factor in higher export formulations revenue owing to short term opportunities.
However, we largely maintain our estimates for FY20-21. We remain positive on the long
term outlook considering expected recovery in India business, increased focus on complex
and niche R&D for US market and track record of healthy return ratios. We maintain ADD
with a revised target of Rs656/share (earlier Rs660).
Table 1: Valuation summary
Y/E EPS P/E EV/E
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 590 FY18 21.9 27.0 18.3 M.Cap. (Rs bn) 111
52 wk Range (Rs) 654/418 FY19E 29.8 19.8 14.1 M.Cap (US$ bn) 1.6
Dividend yield FY19E (%) 1.0 FY20E 30.0 19.7 12.8 Shares Out (mn) 188.5
BSE Sensex 36445 FY21E 35.7 16.5 10.6 Free Float (%) 27.0
Source: Company data, I-Sec research

 Supply shortage opportunity drives export growth: India business revenue


remained muted YoY and below our estimate. This was on a high base on account of
inventory correction post GST implementation. The International formulations
business grew 44.1% YoY mainly with 41.3% YoY growth in US due to one-time
opportunity in few products led by supply shortage. API business witnessed a growth
of 13.9% YoY.
 EBITDA margin driven by higher exports: EBITDA margin improved 140bps YoY to
23.8% above estimate of 18.5%. This was due to higher gross margins led by strong
growth in export formulations despite higher employee expenses. R&D expense stood
at 11.0% of revenue in Q3FY19 and is expected to remain elevated with product
development and filings in complex categories. We believe EBITDA margin would
settle around 21-22% in FY20-21 as additional costs would hit P&L on
commercialization of five new manufacturing units in FY21.
 Outlook: We raise our revenue and earning estimates by 4.0% and 17.6% for FY19
to factor in higher export revenue owing to short term opportunities. However, we
largely maintain our estimates for FY20-21. Overall, we expect revenue and PAT
CAGR of 15.9% and 17.7% over FY18-21. Return ratios to remain stable at RoE and
RoCE of 20.2% and 17.9% in FY21E.
 Valuations and risks: We maintain ADD with a revised target price of Rs656/share
based on 20xSep’20E EPS (earlier Rs660). Key downside risks are: Regulatory
hurdles and forex volatility.

13
India Update, January 23, 2019 ICICI Securities
Table 2: Q3FY19 performance
(Rs mn, year ending March 31)
Q3FY19 Q3FY18 YoY % Chg Q2FY19 QoQ % Chg
Net Sales 10,182 8,400 21.2 11,271 (9.7)
EBITDA 2,422 1,878 29.0 3,023 (19.9)
Other income 35 1 3,420.0 24 48.5
PBIDT 2,458 1,879 30.8 3,047 (19.3)
Depreciation 291 264 10.0 286 1.5
Interest 60 8 625.6 58 2.4
PBT 2,108 1,606 31.2 2,703 (22.0)
Tax 400 298 34.3 703 (43.1)
Minority Interest 9 3 268.0 (1) (1,020.0)
Adjusted PAT 1,698 1,306 30.0 2,001 (15.1)
Extra ordinary income/ (exp.) - - -
Reported PAT 1,698 1,306 30.0 2,001 (15.1)
EBITDA margins (%) 23.8 22.4 140bps 26.8 (300)bps
Source: Company data, I-Sec research

Table 3: Sales breakup


(Rs mn, year ending March 31)
Q3FY19 Q3FY18 YoY % Chg Q2FY19 QoQ % Chg
Domestic 3,650 3,490 4.6 3,850 (5.2)
US 3,080 2,180 41.3 4,190 (26.5)
Other exports 1,400 930 50.5 1,680 (16.7)
APIs 2,050 1,800 13.9 1,550 32.3
Total 10,180 8,400 21.2 11,270 (9.7)
Source: Company data, I-Sec research

Details in our report ‘Beat led by US & ROW, India remains weak’ dated January 22,
2019.

14
India Update, January 23, 2019 ICICI Securities

Just Dial (Buy) TECHNOLOGY


Q3FY19 RESULTS REVIEW AND EARNINGS REVISION
Strong all-round execution Rs481
Kuldeep Koul (+91 22 6637 7573) kuldeep.koul@icicisecurities.com

Target price Rs670 Just Dial reported a strong Q3FY19 across the metrics of growth, traffic, paid campaigns
and unearned revenue. Revenue increased by 2.6% QoQ and 15.2% YoY to Rs2268mn.
Paid campaigns increased by 3.1% QoQ and 10.2% YoY to 4,85,410. Unearned revenue,
though up just 1% QoQ, was up 32.7% on a YoY basis. Traffic increased QoQ by 2.3%
and YoY by 24.8% to 134.2mn unique visitors. FCF generation (including Other Income) in
9MFY19 was very strong at Rs2.4bn or 130% of adjusted EBITDA. Though execution on
collections in Q4FY19 will be critical to how revenue growth is likely to shape up in FY20,
we see our FY20 revenue growth estimate of 11.5% as reasonable to achieve. With
EV/FCF of ~9x FY20, Just Dial is trading ex-growth, despite recent traffic, volume and
growth metrics holding up much better than expected. As we have written earlier, traffic as
defined by Unique Visitors, has grown by >20% YoY in the past 8 quarters, despite
significant disintermediation from Google and vertical specific competition, highlighting the
value of JD as a platform to SME advertisers. Given that growth in unique leads served is
significantly higher than the increase in price per paid campaign, RoI on ad spends for
paid customers is increasing significantly, which should help sustain growth. Maintain BUY
rating with a DCF based target price of Rs670.
Table 1: Valuation summary
Y/E EPS P/E EV/E
Mar (Rs) (x) (x)
Price (22/1/19) (Rs) 481 FY17 17.5 27.5 16.5 M.Cap. (Rs bn) 32
52 wk Range (Rs) 608/382 FY18 21.0 22.9 11.0 M.Cap (US$ mn) 455
Dividend yield FY19E (%) 5.6 FY19E 27.3 17.6 8.1 Shares Out (mn) 67.4
BSE Sensex 36445 FY20E 29.8 16.1 7.4 Free Float (%) 66.2
Source: Company data, I-Sec research

 Revenue growth back to mid-teens; volume growth strong for second


consecutive quarter. Revenue increased by 2.6% QoQ and 15.2% YoY to
Rs2668mn. Paid campaigns increased by 3.1% QoQ (on top of 3.9% QoQ growth in
Q2FY19) and 10.1% YoY with blended realisation (average) also being up 6.1% YoY.
Increase in realisation is despite stronger campaign and revenue growth in non-top-11
cities and towns, where pricing typically tends to be lower. Like-to-like increases in
pricing and bundling of other tech offerings with local search is enabling JD to drive
better realisation, which the company expects to continue in FY20 as well. Unearned
revenue increased by 1% QoQ but 32.7% YoY to Rs3786mn. Execution of collections
in Q4FY19 will be critical to how growth in FY20 may pan out. We are projecting
revenue growth of 11.5% in FY20 for now (vs 13.8% expected in FY19).
 EBITDA margin resilient despite significant sequential increase in advertising
spends. Adjusted EBITDA margin was 26.7% in Q3FY19, an increase of 19.1% YoY.
Adjusted EBITDA declined sequentially by just Rs26mn despite significant sequential
increase in advertising spends from Rs110mn in Q2FY19 to Rs190mn in Q3FY19.
We expect adjusted EBITDA margin to be 26.6% in FY20 vs an expected 27.5% in
FY19, post assuming an increase in advertising spends to Rs700mn in FY20 from
Rs600mn in FY19. Though overall headcount increased by just 0.5% QoQ to 12,476
employees, cold calling feet on street (FOS) resources increased at a healthy pace
from 3387 in Q2FY19 to nearly 3600 in Q3FY19. Productivity of FOS has been
significantly higher than the telesales teams in terms of driving paid campaign
conversions.

15
India Update, January 23, 2019 ICICI Securities
 Strong growth in traffic continues though reliance on Google unchanged.
Overall traffic increased by 2.3% QoQ and 24.8% YoY to 134.2mn. Mobile traffic
increase by a faster 4.8% QoQ and 43.1% YoY with mobile now constituting 78.5% of
overall traffic. Within mobile traffic, mobile website constitutes 90% of total with the
remaining traffic coming through the app. Reliance on Google to attract traffic remains
unchanged with only 25% of traffic having organic recall (~8% through app, 6.4%
through voice and remaining through mobile and desktop websites) with the
remaining 75% coming through search engines including Google. However, >20%
YoY growth in unique visitors for eight consecutive quarters despite Google showing
its own results for local search and significant spends on sponsored search by vertical
focused players speaks to the superior SEO rankings of Just Dial in particular and
resilience of the business model in general. Also, Just Dial’s willingness to spend
more on digital advertising (Google, YouTube, Facebook) in addition to TV and in
Theatres is encouraging, which should help sustain growth in traffic.
 Maintain BUY. Since growth in unique leads served to paid customers is significantly
higher than the increase in price per paid campaign, RoI on ad spends for paid
customers is increasing significantly, which should help drive better stickiness and
superior pricing. Just Dial is trading at an attractive valuation of ~9x FY20 EV/FCF,
especially given healthy near-term growth trends and margin defense. Net cash
balance of Rs1442Cr as at the end of Q3FY19 (buyback of Rs220Cr was completed
on Jan 10, 2019) and strong FCF generation (of Rs240Cr including other income in
9MFY19) should ensure capital return to remain at healthy levels even in the
upcoming years and more importantly provides significant visibility to invest in
adjacencies eventually to diversify the revenue streams. Maintain BUY with a DCF
based target price of Rs670.

Details in our report ‘Strong all-round execution’ dated January 23, 2019.

16
India Update, January 23, 2019 ICICI Securities

Sector Update MEDIA


Mayday for Indian pay-TV
Vikash Mantri (+91 22 6637 7161) vikash.mantri@icicisecurities.com
Abhishek Bohara (+91 22 2277 7637) abhishek.bohara@icicisecurities.com

The New Tariff Order (NTO) is set to be implemented w.e.f. 1st February 2019 by TRAI,
Sun TV Network (ADD)
but local cable operators nationwide have been agitating against it over the past two
Target price Rs589
months on grounds of unfavourable revenue share. Earlier, the NTO was challenged in the
ZEEL (ADD) courts by Star India (broadcaster) and currently Tata Sky is doing the same. The NTO
Target price Rs465 brings about a change that gives power to the consumer to decide what he wants to watch
and pay for. Broadcasters, distributors and LCOs are not comfortable with this change as
it destabilises the current order and brings in uncertainty. While the NTO lacks teeth
without capping of discount between a-la-carte and bouquet prices, we nevertheless
believe it is a step in the right direction and may eventually lead to higher ARPUs until
broadcasters commit harakiri in order to protect their reach. Broadcasters are still
tinkering with their prices and we expect this to continue for 6-12 months until everybody
finds the right equilibrium. We upgrade both Sun TV and ZEEL to ADD from Hold post the
recent decline in their stock prices with target prices maintained at Rs589 and Rs465
respectively. We prefer ZEEL over Sun TV as the former’s market standing continues to
be strong and the proposed promoter stake sale is the only overhang.
 Broadcasters have reduced the prices of channels: Based on pricing by peers and
the relative market positions of channels, most broadcasters have reduced the prices
of their channels – especially their second GECs and movie channels (in a particular
market) and news and infotainment channels in general. While Star India and Sun TV
have not changed their channel and bouquet prices, TV18 Network (TV18), Zee
Group (ZEEL) and Sony have done so multiple times since Oct’18.
 Focus continues to be on bouquets with high discounts: While broadcasters have
cut the bouquet prices based on channel pricing, discounts on bouquets over sum of
a-la-carte prices continue to be high between 30%-65%. ZEEL, TV18 and Sony have
also increased the number of bouquets offered with a few incremental channels in
premium bouquets. Broadcasters will continue to aggressively price bouquets to help
their niche channels gain reach.
 LCOs are up in arms: LCO groups and forums have actively resorted to the social
media to voice their distrust with the NTO and are planning a blackout on 24th January.
LCOs’ main contention is the unfair sharing of network fee of Rs130 being offered by
MSOs in the range of 55-60%, which will mean a reduction in their profitability. Also,
the lack of cap on discount is being used as an argument to scuttle the tariff order
citing that bouquets will still be the default option for consumers.
 ZEEL is well placed with strength of bouquets: ZEEL is slated to report Rs19bn in
domestic subscription revenues in FY19E, implying Rs8.2/sub (BARC universe of
197mn) or Rs13.2 per HSM subscriber. ZEEL’s in its latest RIO announced family
packs in Marathi and Bangla are priced at Rs39/month/sub and, even with a 35%
discount on it and less than 50% subscription, ZEEL’s current revenues are well
protected.
Details in our report ‘Mayday for Indian pay-TV’ dated January 22, 2019.

17
India Update, January 23, 2019 ICICI Securities

Sector Update AVIATION


December traffic growth remains modest
Ansuman Deb (+91 22 6637 7312) ansuman.deb@icicisecurities.com

Domestic passenger (pax) grew by 13% in December 2018, low compared to the past.
Market leader IndiGo grew by 23.7% whereas the growth ex IndiGo was 6.5%. IndiGo
would have higher total growth considering the several new routes it had launched in the
international segment. The lower growth is largely been contributed by Go Air (3% Y-Y)
and Jet group (-6.9% Y-Y). Aggregate PLFs have declined in December, indicating some
yield hardening, but it is significantly better than November in line with typical better
demand during December. PLF decline has been across all major airlines. Market share of
IndiGo stands at 43%, 400bps higher Y-Y. Market share decline continues to be driven by
the two cash strapped full service carriers, Air India and Jet Airways. There has been a
new trend of Go Air topping the On Time performance for two months now, while there has
been dip in OTP for both IndiGo and SpiceJet. The OTP and passenger complaint record
for IndiGo has been poor in recent months which could be due to the neo issues.
 Lower passenger growth is on expected lines. A portion of lower traffic growth
traffic in December is on account of lower capacity and a portion is on account of
higher fare driven reduction in PLFs (same as November). Both of them are on
expected lines as less efficient airlines chose tactical moderation in capacity addition
to prevent major erosion in balance sheet. However, the construct might change with
reduction in crude prices.
 Closer to the organic growth rate which can support fare hike? We have
supported a thesis that structural fare hike is only possible when the capacity growth is
near 15%. The present situation (13% passenger growth and not so low PLFs) tends
to indicate that we are close to that possibility. This might change as airlines start
factoring lower crude and Boeing max deliveries ramp up, but some capacity
rationalisation will continue due to cash flow issues of like Jet Airways/Air India and
increase in international mix of IndiGo, Go Air, Vistara and Air Asia.
 Could supply cycle be recovering? We think so. The increasing international mix
and financial stress of players like Jet Airways can be major enablers towards that.
The overall international share of capacity could increase from 0 to 20% for players
like Go Air, Vistara and Air Asia and it can increase for IndiGo from 15% to 25%
(similar to SpiceJet). The recent codeshare with Turkish Air underlines the
seriousness in intent of IndiGo towards international skies. Considering that IndiGo
already has a market share of 43% in India, internationalisation of IndiGo is no more a
matter of choice.
Details in our report ‘December traffic growth remains modest ’ dated January 22,
2019.

18
India Update, January 23, 2019 ICICI Securities

Oil&Gas weekly
SECTOR UPDATE
OMCs: Marketing margins may drive strong Q4FY19 EPS growth
Vidyadhar Ginde (+91 22 6637 7274) vidyadhar.ginde@icicisecurities.com
Mohit Mehra (+91 22 6637 7386) mohit.mehra@icicisecurities.com

Key recent developments / data-points in the oil & gas sector are:
RIL (HOLD)
Target price: Rs1,131 ‒ Net auto fuel marketing margin is at a super-normal level of Rs6.82/l on 21-Jan’19,
Rs6.06/l in Q4FY19-TD, and Rs1.28/l (up 20% YoY) in FY19-TD.
HPCL (HOLD)
Target price: Rs234 ‒ Singapore GRM at US$2.95/bbl in Q4FY19-TD is down 31% QoQ and 58% YoY;
RIL’s Q4-TD GRM is estimated at US$6.2-6.6/bbl and OMCs’ at US$3.3-3.7/bbl.
BPCL (HOLD) ‒ US oil output was up 202k b/d WoW but crude inventory was down 2.6mn bbls WoW
Target price: Rs283 in the W.E. 11-Jan’19 and US oil rig count was down by 21 last week.
 Super-normal marketing margin may drive OMCs’ strong Q4 EPS growth and
improve FY19 earnings outlook: Net auto fuel marketing margin is at a super-normal
level of Rs6.06/l or US$14/bbl in Q4FY19-TD. This implies marketing margin of
US$9.1-9.3/bbl on BPCL’s and HPCL’s sales volumes; auto fuels are 65%-67%
respectively of their sales volumes. Super-normal auto fuel marketing margins may
thus drive strong Q4FY19 EPS growth and bolster FY19E EPS of OMCs; OMCs’ FY19
EPS may be flat or up YoY despite their 9MFY19 EPS likely to be down 11%-25%
YoY. FY20 earnings outlook would depend on strength of new government.
 Q4-TD Singapore GRM at a 37-quarter low: Singapore GRM at US$2.95/bbl in
Q4FY19-TD is down 31% QoQ/58% YoY, and at a 37-quarter low. Diesel and petrol
cracks in Q4-TD at US$11.7/bbl and US$3.1/bbl are down 22% and 36% QoQ
respectively. Petrol cracks are at a 41-quarter low and diesel cracks at a 7-quarter low
in Q4-TD. US distillate consumption, which was up 6% YoY in CY18, is down 9% YoY
in the last four weeks. US distillate and petrol inventories are up in the last 4-7 weeks
by 23-31mn bbls (14%-19%) respectively and are now 4%-11% above 5-year average
levels. Singapore middle distillate inventory is 11% above 5-year average.
US distillate inventory up 19% in last 4 US petrol inventory up 14% in last 7
weeks and 4% above 5-year average weeks and 11% above 5-average
Distillate inventory 5-year average inventory level US petrol inventory 5-year average
180 270
170 260
160 250
150 240
(mn bbl)

(mn bbl)

140 230
130 220
120 210
110 200
100 190
Jul-14

Jul-15
Jan-14
Apr-14

Oct-14
Jan-15
Apr-15

Oct-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19
Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Source: Bloomberg, I-Sec research Source: Bloomberg, I-Sec research

 RIL expects 2m b/d global net refining capacity addition in CY19: RIL expects 1)
global net refining capacity addition of 2m b/d in CY19 as per their Q3FY19
presentation vs 1.5m b/d addition as per Q2 presentation; 2) impact of incremental
supply from refinery projects from Jul’19 and the full impact by the end of CY19; and
3) positive impact on GRM of IMO mandated sulphur specs change on marine fuel

19
India Update, January 23, 2019 ICICI Securities
from Oct’19. Thus, it appears large refining capacity addition may keep GRM weak
until Sep’19 and partly dilute the positive impact of IMO on GRM thereafter.
 Sharp oil rig count fall last week suggests US oil output may rise less than
expected unless WTI recovers further: WTI and Brent was up 4% last week to
US$53.8-62.1/bbl. US oil rig count, a lead indicator of shale oil output trend, declined
by 21 last week and is down by 33 in CY19-TD and by 36 from the level in W.E. 16-
Nov’18 when WTI was over US$55/bbl. Declining rig count reaffirms that WTI needs to
rise further for US oil production to rise as much as expected in CY19.

Details in our report ‘OMCs: Marketing margins may drive strong Q4FY19 EPS
growth’ dated January 22, 2019.

20
India Update, January 23, 2019 ICICI Securities

Results date reckoner


January 2019
Sun Mon Tue Wed Thu Fri Sat
1 2 3 4 5

6 7 8 9 10 11 12
Bajaj Corp, TCS Infosys
IndusInd Bank

13 14 15 16 17 18 19
ZEEL, HMVL, HT Media, AU Bank, LTTS, ICICI Lombard, HDFC Bank,
MCX, India Grid Mindtree, DCB Cyient, Federal L&T Infotech, South Indian
Bank Bank, HUL, RIL Wipro, NIIT Bank
Tech, Kajaria,
20 21 22 23 24 25 26
LTFH, Just Dial, TVS Motor, I-Pru, Navin Flourine, Colgate, MMFS, Dewan
Kotak Bank, UBI, Asian Paints, Pidilite Ind, ITC, MphasiS, Housing, Maruti
HZ Alembic, Shree DB Corp, IndiGo UltraTech, Suzuki, L&T,
Cement, Havells, Supreme Ind, Yes GRUH Finance,
Oberoi Realty Bank, SCUF,
Quess,Rpower, Whoderla
Hatsun, Edelwise,
Suntek Realty
27 28 29 30 31
RBL Bank, TTK Axis Bank, GCPL, Bajaj Auto, Dabur, Emami,
Prestige, Godrej Info Edge India, Hexaware, V-Guard, Magma,
Properties, Tata HDFC, Ramco Jubilant Food, Hero Moto, Bharti
Power, SHTF, RBL Cement, Chola, BEL, Airtel, Vedanta,
Bank, CUB, CEAT Crompton, Heritage Food, Power Grid,
Kansai, MGL, Dixon, JSW Petronet LNG.
Wabco, HCL Energy, Astra Solar Ind,
Tech, Blue Star, Microwave, Kolte
BoB, Cera, KEC Patil, BPCL,
Intl, MHRIL, Ashoka
Buildcon, NTPC,
TCOM, LICHF

February 2019
Sun Mon Tue Wed Thu Fri Sat
1 2
Dr Reddys, Parag Milk, JK
Berger Paints, Cement
Kalpataru
Power, BSE,
Galaxy
Surfactant, SBI
3 4 5 6 7 8 9
ABFRL, Insectiside Marico, TechM, Cipla, Prsim Bajaj Electricals, M&M, TV Apollo Hospital,
GAIL, ACC, Johnson, JSW Tata Motors, Today, Dr Lal VRL Logitstics,
GSPL, HPCL, Steel, Cummins, Grasim Pathlab, ISGEC Heavy
Trent ENIL, PTC India Thermax,
Greenply
10 11 12 13 14 15 16
Motherson Sumi, Prestige Estate BOSCH
PFC, Somany

17 18 19 20
Mahindra CIE

21
India Update, January 23, 2019 ICICI Securities

Recent reports/updates
Analyst Company/Sector Date
Kuldeep Koul Just Dial: Strong all-round execution Jan 23
Krupal / Dharmesh Shree Cement: Strong beat, price improvement remains key Jan 23
Abhijit Tibrewal ICICI Prudential: Trying hard to rediscover its Midas touch Jan 23
Nimit / Manoj / Rahil Asian Paints: All-round beat Jan 23
Sriraam / Vinay Sun Pharma: Management acts to assuage concerns Jan 22
Vikash / Abhishek Havells India: Strong growth; tad disappointment on margins Jan 22
Nishant / Tushar TVS Motor: Realisation surprise reflective of growth quality Jan 22
Sriraam / Vinay Alembic Pharma: Beat led by US & ROW, India remains weak Jan 22
Vikash / Abhishek Media sector: Mayday for Indian pay-TV Jan 22
Ansuman Deb Aviation sector: December traffic growth remains modest Jan 22
Vidyadhar / Mohit Oil&Gas weekly: OMCs: Marketing margins may drive strong Q4FY19 EPS Jan 22
growth
Abhijit / Rohan Hindustan Zinc: On track Jan 21
Kuldeep Koul NIIT Technologies: Consistency of execution the key highlight Jan 21
Nimit / Manoj / Rahil Paints sector: Entry barriers fortify incumbent players Jan 21
Kuldeep Koul LTTS : Strong growth to continue despite client specific issue Jan 21
Abhijit Tibrewal ICICI Lombard: Strong growth dwarfs profitability Jan 21
Sachin / Sandeep HDFC Bank: Focus on funding the growth opportunities Jan 20
Kuldeep Koul Wipro: Better placed than peers on margins Jan 20
Kuldeep Koul L&T Infotech: Limited catalysts for re-rating Jan 20
Abhijit Tibrewal AU Small Finance: Growth intact; focused on deposit franchise Jan 20
Nehal / Jigar Kajaria Ceramics: Clinical performance as anticipated Jan 20
Sanjesh Jain Telecom sector: Mobile broadband subscriber add jumps for Bharti & VIL Jan 20
Vidyadhar/Sanjesh/Mohit RIL: Cyclical downturn to overshadow RJio/Retail? Jan 18
Manoj / Vismaya HUL: Likely levelling-off of margins, as expected Jan 18
Renish Bhuva Federal Bank: Strong earnings trajectory sustained Jan 18
Kuldeep Koul Cyient Ltd: Significant growth acceleration ahead Jan 18
Vikash / Abhishek HT Media: Another disappointing quarter Jan 18
Sriraam / Vinay Aurobindo Pharma: Acquires oncology innovative portfolio to augment US Jan 18
presence
Sanjesh Jain Telecom sector: RJio to monetise tower and fibre assets Jan 18
Kuldeep Koul Mindtree: Some niggling concerns but broadly in-line Jan 17
Renish Bhuva DCB Bank : Focus on profitability; return ratios set to improve Jan 17
Abhijit / Rohan Metals (Non-ferrous) sector: Are non-ferrous valuations about to gyrate to Jan 16
0.5x book?
Abhijit / Rohan Metals (Steel) sector: Volume miss Jan 16
Vinod / Siddharth India Strategy: FPIs’ buying wanes – sell bank and IT stocks in Dec’18 Jan 16
Vikash / Abhishek ZEEL: Strong beat; focus on stake sale Jan 16
Nimit / Rahil MCX India: Robust volume growth drives strong performance Jan 16
Nehal / Jigar Tiles sector: Morbi players fragile; opportune time for brands! Jan 15
Sriraam / Vinay JB Chemicals & Pharmaceuticals (Rs301): Attractive value play Jan 15
Krupal / Dharmesh Cement sector: Strong volume growth continues; newsflow on pricing to Jan 15
improve
Vidyadhar / Mohit Oil&Gas Weekly: Large refining capacity addition in Asia may keep GRMs Jan 15
weak
Kuldeep Koul Infosys: Operating margin – how low can it go? Jan 13
Kuldeep Koul TCS: Supply side constraints – a high quality problem to have Jan 11
Vidyadhar / Mohit Oil&Gas Preview: ONGC: Oil & gas price rise and weak INR to drive growth Jan 11
Nimit / Rahil Bajaj Consumer Care: Healthy volume growth Jan 10
Krupal / Dharmesh FLFL: Brand factory leading growth; capex intensity remains high Jan 10
Sanjesh Jain Telecom: Post-paid continues to drag consumer spend Jan 10
Sachin / Sandeep IndusInd Bank: Continued robust operating performance Jan 10
Sanjesh Jain Bharti Infratel: Fiber is a big opportunity, but still sometime away Jan 10
Abhijit / Rohan Jindal Steel & Power: Continues to focus on deleveraging Jan 10
Renish Bhuva Banks & Financials Quarterly Results Preview: PPoP to be driven by strong Jan 10
revenue growth and higher treasury gain
Krupal / Dharmesh Branded Apparel Quarterly Results Preview: Shift in festive season to aid Jan 10
growth / profitability
Ansuman Deb Aviation Quarterly Results Preview: Breakeven fare growth difficult; expect Jan 10
losses to narrow
Nimit / Rahil Exchange Tracker: December 2018 Jan 10
Vinod / Siddhrth Strategy: Expect expensive, quality and growth stocks to outperform Jan 10
Renjith / Vipin Siemens: Creating new vistas for growth Jan 9
Krupal / Dharmesh Cement Quarterly Results Preview: Sector at an inflection point Jan 9
Vikash / Abhishek Media: Quarterly Results Preview - Base effect in play in this seasonally Jan 8
strong quarter

22
India Update, January 23, 2019 ICICI Securities

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23