INSTITUTIONAL EQUITY RESEARCH Consumer Electricals & …backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Channel_Partners_and...We are happy to report that our Meet Experts/Channel

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Consumer Electricals & Agri Inputs Channel-Check Day: Key takeaways

INDIA | CONFERENCE UPDATE

25 March 2019

We are happy to report that our Meet Experts/Channel Partners: “Ahead of the Season" on 19th March 2019, in which we hosted distributors, dealers, and channel partners, WAS A BIG SUCCESS! This report highlights the key takeaways from our interactions

Boardroom meeting participants

Consumer Electricals Channel Partners Multi-brand ACs (West)

Voltas & Beko (North)

Symphony, Samsung, TTK (North)

CG (GTM Distributor), Samsung (North)

Orient Electric (North)

V-Guard Ltd, Phillips (North)

Polycab (West)

AGRI Inputs Ex-CMD of RCF, NFL and PDIL (Project & Development India Ltd, a

government consulting company). Earlier: Chairman of Fertilizer Association of India (FAI).

Ex-Head of agribusiness in Deepak Fertilizer (Earlier: Business Head in

Rallis India/Tata Chemicals)

Ex-MD of Paradeep Phosphate (part of Zuari). Earlier: Chairman of FAI

Distributor of Agri inputs - Haryana Region / Punjab Region and Agri Chemical - UP Region

Distributor of Agro inputs – Maharashtra and All India Agro Input Dealer

Association – President

Deepak Agarwal (+ 9122 6246 4112) [email protected] Surya Patra (+ 9122 6246 4121) [email protected] Deepak Chitroda (+ 9122 6246 4117) [email protected]

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

CONSUMER ELECTRICALS & AGRI INPUTS KEY TAKEAWAYS

Consumer Electricals Channel Partners from Pan India Multi Brand - AC (West) Products: Air Conditioners Brands: Voltas, O-General, Panasonic, Mitsibushi, Haier, Bluestar, Daikin

Extended winter has hurt the AC industry. Companies have given discounts/incentives to push the stock in the channel (prices are down by c.Rs 3,000 yoy and up c.Rs 2,000 qoq for 1.5-tonne ACs).

Giving higher credit of 21 days.

Although companies want to increase prices, mainly to pass on higher RM cost, they are hesitant due to unfavourable market conditions (channel expects 4-5% price hike this season).

Currently, channel partners are piled up with old inventories; not keen on purchasing new inventory because of to market uncertain.

Voltas continues to gain market share despite a bad season, mainly because of strong brand recall vs. other AC brands. Also, after-sales service of Voltas is best in the industry.

Customers will be more price-centric than brand. Customers generally prefer mid brands with low prices. Voltas generally fits into their criteria.

Lloyd has lost its market share, mainly because of its strategy of premium – now Lloyd products are priced above Voltas.

LG has market share of 11-12% vs. 42% when it entered Mumbai market.

AC industry is shifting to inverter ACs and the government, through its policies, is also trying to increase penetration in the rural market as these ACS save power consumption.

Voltas & Beko (North) Products: Air conditioners, washing machines, refrigerators Brands: Voltas and Beko.

ACs is mostly a price-driven market; channel focus is on higher-margin brands. There is higher stocking of ACs with dealers mainly in the off-season.

Channel pushes more inverter ACs mainly as distributors and dealers don’t have to incur service cost due to fluctuation of voltage in rural regions. Price difference between inverter and non-inverter ACs has reduced to Rs 2,000-2,500.

Higher inventory stocking was done by channel partners due to higher discounts given by companies.

Rajasthan region has seen a decline in window AC demand – where the ratio of window ACs vs. split is 10:90 (previously 40:60)

Voltas has seen volume growth yoy and is expected to gain market share this year also.

70-80% of distributors’ sales are through channel financing (mainly from Bajaj Finance).

Voltas gives one-week credit whereas Beko doesn’t give any credit.

Channel margin in Voltas is c.5% vs. Beko at 8-9%.

Beko has a very strong product profile – prices are equal to Samsung and LG, but higher than Godrej and Whirlpool.

Currently, the company is not doing aggressively branding; expect it to start from March 2019 once the season begins.

Beko is expect to launch 4-5 SKUs in April 2019 in direct cool, washing machines, and deep freezers.

Beko is also planning to enter the small appliances segment such as irons.

Price matrix: 1.5-tonne inverter ACs Period Price

Last year Rs. 33,000-34,000 Nov’18-Dec’18 Rs. 29,000-30,000 Mar’19 Rs. 32,000-33,000 Note: Distributor Price

The channel expects companies to cut prices at the end of March 2019 (after Holi) mainly to push stock



Symphony, Samsung, TTK (North) Products: Air coolers, ACs, and home appliances Brands: Symphony, Samsung, and TTK

Previously, retailers used to stock up in the off-season because of discounted prices, but now the scenario has changed. Risk appetite of retailers is low, as they have seen two consecutive bad summers. This season retailers have not stocked much and are not carrying much old stock.

Symphony’s channel partners have reduced their investment and stocking in air coolers by 40-50%. The company is aggressively pushing the channel for higher stocking by giving discounts and higher incentives.

Symphony’s channel partners have given advances and booked stock at lower prices (off-season pries). They will take delivery once the season starts.

Symphony is tracking inventory – both at the distributor and the dealer level – through its app.

Others air-cooler companies have faced difficulty in collecting advances in the off-season.

In cooling products generally retailers have 2-3 brands, but focus on only one brands that they have stocked at lower prices.

Water heaters segments have done great business last quarter, as the winter was intense and long.

Samsung couldn’t make its presence felt in the AC industry, but it has become aggressive and is coming up with higher targets for distributors.

Samsung – CG Consumer Distributor (GTM) (North) Products: Fans, air coolers, and home appliances. Mobile phones, LEDs, and ACs. Brands: Crompton Greaves consumer, Samsung.

CG Consumer has implemented GTM (Go to Market) in fans.

Distributor earns low margin vs. retailers.

GTM distributors are getting (3-5%) higher discount vs. wholesalers.

CG is focusing on building its distribution model and has assured distributors that business through the wholesale channel will end gradually (it is giving better pricing to distributors).

GTM - Distributors maintain 1-month inventory.

CG gives CD (cash discounts) of 2.0-2.5% on upfront payments.

There are total three distributors in Rajasthan – in Jaipur, Jodhpur, and Kota.

Crompton has appointed a dedicated sales team to improve visibility (through daily visits to retail counters with the distributors’ team).

After the set-up of Crompton’s distribution channel, the problem for after sales service is now resolved; it expects to gain retailer confidence and market share in fans.

Crompton is offering two-year warranty on most products; 5 on some.

Sales of premium fans have started picking up.

Crompton has recently launched fans that run on 110 Volts, which will be mostly sold to rural consumers where the supply of electricity is dim.

Through distribution, the presence of Crompton’s products has increased as the touch points have increased.



Orient Electric (North) Products: Fans, lighting, switchgears Brands: Orient There is a trend towards premiumization of fans. Orient is continually launching

new premium products in its Aero series. These products are priced at Rs 4,000-Rs 7,000 per fan. Currently, these products are c.5% of total sales.

For Orient, Havells and Crompton are key competitors in fans.

Orient is gaining market share mainly because of aggressive new launches and branding.

Overall market growth is weak due to prolonged winters this year where demand is stagnant.

A recent Orient launch – Areo Slim – is gaining market share. Priced at Rs 7,000.

Lights business is currently not doing too well, as prices keep declining.

Syska started offering two-year guarantee at lower prices, which is now followed by all other players.

Orient offers one-month credit period to dealers.

To push inventories, Orient has given discounts in the mass segment of fans (economy range).

Over the last 1-2 years, Orient has increased its interaction with channel partners; its sales team visits them once in every two weeks.

V-Guard, Philips (north) Products: Wires & Cables, fans, air coolers, lights Brands: V-Guard and Philips

North market runs on brand loyalty, but has many local players.

Product quality of most brands is similar, but brand perception and distribution strength are differentiators.

There have been several new brand launches in the last few years with little retail space. This has led to an increase in bargaining power of retailers, leading to reduction in distributors’ margins.

V Guard offers a 30-day credit and has 3.3% cash discount.

V-Guard is investing on IT systems to track dealer inventory. BJE already has a tracking system.

Wires have higher correlation with real estate, therefore, lower demand. Tier-2 cities are seeing higher demand vs. metros.

Wire manufacturing cannot be outsourced due to quality issues, but all brands have similar quality. Quality perception is largely driven by advertising.

V-Guard fans are priced at par with Compton Graves and Orient, but lower than Havells.

V Guard has positioned its products in the premium segment. It is present in the Rs 1,100-2,600 price range.

V-Guard’s distributors/dealers enjoy higher margins compared with other companies, as it is new.

Phillips is strong in lighting with more than twice the market share of the #2 player.

Its quality and service has helped it grow in the past few years. Retailers are not having much shelf space left for other new brand.



Polycab – (West) Products: Wires, cables, fans Brands: Polycab

Wires & Cables

Polycab has maintained a strong market in Maharashtra in cables for the last 20 years

Many large companies have started cartelization (Polycab, Havells, KEI Industries, RR Kabel, Finolex Cables). It was formed 2-3 years ago. They mutually decide a price and within a week, they implement the price. V-Guard is not a part of this cartel because it wants to gain market share.

14-15 distributors are present in Maharashtra, where they keep a running inventory of 15 days to 30 days of odd products.

Due to fluctuation in copper prices, Polycab gives 15 days backward coverage to distributors.

Polycab has increased its spending on marketing and advertisement aggressively in the last one year.

Management interacts with distributors and dealers regularly. A sales executive visits weekly.

Polycab hiked prices by 3.25% in March 2019 which compared with last year is at the same range.

Polycab’s is well entrenched in the Western market; the only factor that will help it to grow is availability of its products in other regions.

Fast Moving Electrical Goods Fans prices are at par with Bajaj and CG models.

Premium fans contribute 20% of its fan portfolio revenue.



AGRI Inputs Ex-MD of Paradeep Phosphate Part of Zuari. Earlier: Chairman of FAI Fertiliser industry continued to suffer due to inadequate budget allocations –

large amount of unpaid subsidy dues carried forward each year. Unpaid subsidy at the end of FY18 was Rs 320bn.

Indian urea sector continued to suffer due to fully regulated pricing policy, non-payment of increased fixed cost, unreasonable reduction in energy consumption norms, unfavourable policy for production beyond 100% of re-assessed capacity, and discriminatory policies for naphtha based plants.

Partial decontrol of prices (i.e., fixed subsidy and flexible pricing) favoured the non-urea fertilizer (P&K-based complex) segment. However, extensive dependency on imported raw material (70% imported) coupled with fluctuating material prices as well as currency keep the outlook fluctuating.

Among all fertilisers, urea is the leading one for India with an annual consumption of 30mn tonnes, which account for 55% of total fertilizer consumption in the country. Higher consumption of urea is mainly due to the 100% controlled pricing policy, which makes the urea price significantly lower than P&K-based non-urea fertilizers.

Currently, about 75% of fertilizer subsidy goes into urea and is one of the reason for imbalanced fertilizer consumption in India.

Due to lack of input material linkage, India imports about 40% of its non-urea fertilizer requirements. China plays a leading role due to input material advantage in ammonia (supported by coal gas), rock phosphate, etc.

GST on fertilizers and raw materials was implemented from 1st July 2017. GST rate on finished fertilizers was brought down to 5% from the initially announced 12%. However, GST on key raw materials (ammonia, naphtha, sulphuric acid, etc.) were kept higher (at 18%) than finished fertilizers.

Government of India rolled out the DBT scheme for fertilizers in all states between 1st September 2017 and 1st March 2018. However, under this, subsidy is not transferred directly into the accounts of the beneficiaries (as it is for LPG). Fertilizer subsidy continues to be routed through the industry. Entitlement of subsidy takes place after sales are made by retailers through their POS machines. However, there are several policy and operational issues in implementation of DBT here, which are delaying or even denying subsidy on products sold under the new scheme.

Due to the prevailing challenges in DBT implementation and no timely payment of subsidy, trading in fertilizers has gradually declined.

Ex-CMD of RCF, NFL and PDIL (Project & Development India Ltd – a government consulting company). Earlier: Chairman of Fertilizer Association of India India’s urea consumption is about 30-31mn tonnes with domestic production of

about 24mn tonnes. The balance of about 6-7mn tonnes is imported.

Indian fertilizer market is controlled by the government and divided into two segments – urea and non-urea. In urea, existing producers have a separate policy based on energy consumption norms, while upcoming or new urea plants are governed by the New Investment Policy. The government pays c.70% as subsidy and companies recover the rest via MRP from the market (flexible subsidy and fixed MRP).

Non-urea products are operated under the Nutrient Based Subsidy (NBS) Policy, under which the government pays about 30% as fixed subsidy and companies recover the rest through MRP (fixed subsidy and flexible MRP). Non-urea



companies are better placed (for e.g., Coromandel) than urea companies due to their limited exposure towards subsidy receivable from the government.

There are 30 urea units – out of these three are still running on naphtha as feedstock (Mangalore Chemicals, Madras Fertiliser, and SPIC) due to non-connectively of gas pipelines.

The new policy announced in 2015 for existing urea plants is based on energy norms that should support efficient units such as Yara Fertilsers (earlier Tata Chemicals’ urea unit), Nagarjuan Fertiliser, Chambal Fertiliser, and IndoGulf who are placed at the lower end of the cost curve.

The government aims to add five urea units – Ramagundam (Telegana) by NFL and other JV partners, Sindri (Jharkhand), Barauni (Bihar) and Gorakhpur (UP) by Hindustan Urvarak & Rasayan Ltd (a JV of Coal India, NTPC, Indian Oil, FCI) and Talcher (Odisha) by Talcher Fertiliser Ltd (a JV of Coal India, RCF and GAIL). The combined capacity of these five units will be about 8mn tonnes from government-led projects and one additional urea unit from Chambal Fertiliser (Gadepan III).

Neem coating of urea and reducing bag size to 45 kg/bag has limited the negative impact of urea consumption. However, to reduce the cost of cultivation, farmers are expected to consume more urea in the present scenarios – where prices of non-urea products are higher.

Ex-Head of agribusiness in Deepak Fertilizer Earlier: Business Head in Rallis India/Tata Chemicals)

DBT was implemented from February 2018, after a pilot project in across 19 districts. DBT aims at two things: (1) capturing real time data and (2) accuracy of data.

DBT has changed the flow of subsidiary . ‘Point of Sale’ machines are placed across India (c.225,000) to sell fertilisers. Subsidy is paid to companies after actual purchases – by recording these in PoS machines.

Key challenges for DBT rollout are: (1) Aadhar authentication failure, (2) weak internet connectivity, (3) delay in update of stock positions by wholesalers, (4) improper land records, (5) large number of tenant farmers, (6) stock reconciliation issues, and (6) integrating the entire system for transferring.

With proper DBT implementation, the subsidy will be directly credited to farmers’ bank accounts, just like LPG subsidy. In this system, government aims to provide recommendations about fertilizers consumption based on the data captured in PoS devices and correlating it with soil health in that area. However, it may take 2-3 more years to implement DBT and for its real benefits to reflect in the system.

India is a net importer of key raw materials to produce NPK and other specialty fertilizers. India’s demand scenario: o (1) NPK: India produces 7.5mn tonnes, imports 0.5mn tonnes o DAP: produces 4.5mn tonnes, imports the same amount o MOP: 100% imported

For Kharif season, monsoon will remain a key factor for a few states. Important states such as UP, Haryana, and Punjab are c.90% irrigated and may not be majorly affected because of a shortfall in rain, but for Maharashtra and Telangana, which are large states with only 18% and 15% irrigation, the dependency on regular monsoons is much higher.

The industry needs to move towards specialty fertilizers with a combination of micronutrients soon, in order to maintain or improve farm productivity. Few players (Coromandel, Chambal Fertilizer, Zuari Agro) are moving towards these complex grades.

Awareness of these complex grades has increased substantially over the past few years and companies such as Deepak Fertiliser, Coromandel International and Zuari Agrochemicals have managed to introduce different grades over the past few years.



Demand for fertilizers will remain strong ahead, driven by increasing demand for more quality/balance food items, domestic consumption, rising purchasing power, and larger population.

Non-urea companies with lower dependency on government subsidiaries (Coromandel, Chambal Fertiliser, Zurai, Deepak Fertilizer) are growing at a good pace and expanding their product offering and capacities to meet domestic demand.

Distributor of Agri inputs - Haryana / Punjab Agri Chemical -

Uttar Pradesh There is limited competition in fertilizers compared with pesticides. Matured

molecules (more than 2 or 3 years in the market) are difficult to sell in Punjab and Haryana (despite strong push by companies) as farmers prefer new or combination products.

Branded products of global innovators (Syngenta, FMC, Bayer, BASF) are sold easily compared with domestic pesticides companies as most of the time MNCs provide similar discounts or offers along with farmers support.

Punjab pesticide market is close to Rs 12-15bn.,Good monsoon brings demand to the high-end of the market. Dealers expect demand to stay decent in 2019-20 with a recent predictions of normal monsoon by Skymet; although clarity will only emerge towards the end April or May.

Agriculture-input demand was negetaively affected this year due to limited sowing, especially in UP. Farmers’ costs for sowing have increased, mainly for pesticides and P&K grades of fertilizer (DAP and MOP).

DAP prices for most companies such as Chambal Fertilizer, Zuari Agro, Mosaic India, IFFCO, and Kribhco is close to Rs 28,000/tonne compared with Rs 29,000 in December 2018. Urea is sold at a uniform price across the country at Rs 266/bag and dealer margin is close Rs 16/bag.

The government’s announcement to pay Rs 6,000 per year as income support (up to 2 hectares of land) under PM-KISAN programme will benefit agriculture inputs companies first, as farmers will consider buying required volumes and quality products, especially pesticides.

Crop-insurance schemes by the government are not popular among farmers due to cost, limited awareness, or understanding – and also because of the many terms/conditions put forward by insurance companies. However, farmers taking farm loans have to take crop insurance (it is mandatory). This benefits farmers in case of crop losses, where they at least recover their costs.

Terms and conditions are clearer for pesticides companies compared to earlier years, and MNCs brands have better recall among farmers vs. local or domestic brands.

‘Nomini Gold’ (Bispyribac Sodium – herbicides for paddy) of PI Industries has greater awareness among farmers compared to similar molecule products from other companies.



Distributor of Agro inputs President – All India Agro Input Dealer Association

GST has brought transparency and accountability into the distribution system. Black-marketing of fertilizer products is almost over and there is only a single rate for fertilizer products across the country. GST rates for fertilizers and pesticides are at 5% and 18%.

The government announcement an income support of Rs 6,000 per year benefit farmers of Maharashtra (who have suffered the most with a drought-like situation, especially on the eastern side). Maharashtra’s situation is expected to improve over the medium term with better irrigation facilities and crop insurance awareness.

Crop insurance among farmers is slowly improving, but government needs to improve awareness and reduce inconvenience (making terms and conditions simple terms, combining insurance for farmers’ families or groups of families).

Consumption of bio-fertilizers or bio-pesticides is considered as premium product for farmers, as these are costlier and nutrient impact is less visible in short term. Also, a group of small unorganized companies sell sub-standard products, which most dealers try and avoid.



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