Road Less Travelled - PhillipCapitalbackoffice.phillipcapital.in/Backoffice/Research... · ITC: E-cigarette threat – small but meaningful in the long term by Vishal Gutka & Preeyam

INSIDE THE ISSUE

MAHINDRA FINANCE: Business slows down ahead of elections; collection efficiency remains healthy Q4 is a weak quarter for Mahindra Finance; weakness will probably continue in Q1FY20

Detailed story on pg. 2

CONSUMER DURABLES: Retailers not yet upbeat this summer despite improving demand In the past weeks, we interacted with major air-coolers and air-conditioner channel partners because of extended winters and coming summer demand.


HOTEL: One person’s loss is another’s gain Our recent interaction with premium-segment hoteliers indicates that the current unforeseen situation in passenger airlines have caused havoc among consumers as the number of flights are limited, many of them are delayed or cancelled, and/or are available at exorbitant prices at preferred timings.


RETROSPECTIVE PERSPECTIVE

Snippets UBER IPO filing – eyes-are-a-popping

From authoritarianism to democracy

Could this be the beginning of the end for Edrogan?

The Brexit saga continues…

Rattling the cages: OBOR in Latin America

News round-up of the month

Detailed story on pg. 5 & 6

ITC: E-cigarette threat – small but impactful in the long term We interacted with the largest E-Cigarette distributor in India. He said that although the E-Cigarette business is very small currently as a percentage of the overall cigarette market, it is growing rapidly due to the millennials’ affinity towards it; some smokers want to quit cigarette and take up E-Cigarettes.


RETAIL SECTOR We organized Phillip Capital’s 1st Annual Retail Conference on 14th March in Mumbai with the theme ‘Disruption in retail through Digital Transformation’.


Road Less Travelled

18 April 2019 | Vol-1, Issue-4

MONTHLY PUBLICATION

18 April 2019 | Vol-1, Issue-4 Road Less Travelled | MONTHLY NEWSLETTER

MAHINDRA FINANCE: Business slows down ahead of elections; collection efficiency remains healthy by Pradeep Agrawal

Q4 is a weak quarter for Mahindra Finance; weakness will probably continue in Q1FY20. • Our channel checks suggest that Q4 is a weak

quarter for Mahindra Finance in terms of business with disbursement growth in single digits. While January and February were relatively better months, business was weak in March.

• The weakness will probably continue in Q1FY20. Mahindra Finance’s target customer segment is very politically sensitive and is likely to avoid buying any vehicles during elections.

• Business weakness is likely to prevail in H2FY20 as well, as OEMs cut production in preparation for transition to BS-6. Weak monsoon (forecasted) will also depress demand. We believe growth is likely to remain muted at 12-15% for FY20.

• On the bright side, cash flows remained healthy and collection efficiency improved in Q4FY19, driving an improvement in asset quality.

• Strategy: Mahindra Finance will launch consumer durable loans in H2FY20 and scale up personal loans (pilot conducted last year). These two segments should improve its cross-selling opportunities and will have separate dedicated teams (already hired).

• At CMP, the stock trades at 2.2x FY20 BV with an RoA of 2.3% and RoE of 14.5%. We have a Neutral rating on the stock with a target of Rs 425.

CONSUMER DURABLES: Retailers not yet upbeat this summer despite improving demand by Deepak Agarwal & Akshay Mokashe

In the past weeks, we interacted with major air-coolers and air-conditioner channel partners because of extended winters and coming summer demand. Air coolers

In air coolers, higher temperatures have led to higher liquidation of inventory – one northern channel partner saw c.40% inventory liquidated in just 15 days.

Retailers are still not convinced about recent momentum, so they are carrying much lower inventory in air coolers (they have seen two consecutive bad summers in the past).

Symphony, a market leader in air-coolers (c.50% market share in organized segment) from June 2018 to March 2019, has undertaken only moderate increase in prices due to an inventory overhang.

Air conditioners

Delayed summer resulted in delayed secondary sales in Q4FY19; these have picked up from early March and are expected to be strong in Q1FY20.

Higher competition has deepened the penetration of air-conditioners – availability of multiple brands and product portfolio has improved in tier 2 and 3 cities.

Voltas’ market share continues to grow via strong brand positioning and strong product profile under the Beko brand.

Channel partners have piled up old inventories; not keen on purchasing new inventory because of market uncertainty.

HOTEL: One man’s loss is another man’s gain by Deepak Agarwal & Akshay Mokashe

Our recent interaction with premium segment hoteliers indicate that the current unforeseen situation in the passenger airlines have caused havoc among consumers as number of flights are limited, many are delayed or cancelled, and/or are available at exorbitant prices at preferred timings. As a result, many people have opted to stay back in work-related destinations and are booking later flights, which has increased hotel occupancy. Hoteliers have seen their strongest occupancy (in the last 3-4 years) in February and March 2019 . They haven’t increased their ARRs as this demand is cyclical and not certain.


ITC: E-cigarette threat – small but meaningful in the long term by Vishal Gutka & Preeyam Tolia

We interacted with the largest E-cigarette distributor in India. He said that although the E-cigarette market is very small currently (as a percentage of the overall cigarette market) it is growing rapidly due to the millennials’ affinity towards it. Some smokers want to quit regular cigarettes and take up E-cigarettes. He expects growth to pick-up meaningfully once regulations relating to distribution/manufacturing are put into place, and because it is relatively less harmful than cigarettes and other tobacco products. He said there are more than 500,000 'vapers' in India and the market size is Rs 8bn.

Who are Indian vapers? • Smokers who are looking to quit. They are mostly upper/upper-middle class people, so they have the power to purchase E-cigarettes. Mostly, these

customers are in the age group of 25-35 years, especially those who travel extensively and are in touch with latest technological advancements, • Teen’s vaping isn't a big issue in India (as it is in the US) because the device price point (at > Rs 5,000) is not exactly affordable to them. Moreover,

teenagers generally start consuming single loose cigarette sticks (that too Deluxe / Regular Size Filter Segment – cigarettes priced at Rs 5/10 given their limited purchasing power.

Why are E-cigarettes less harmful than regular cigarettes? A typical cigarette burns at 900-1,000

degrees (you read it right) and produces tar, which causes cancer. It is important to note that nicotine does not cause cancer. Since E-cigarettes burn at much lower temperatures vs. typical cigarettes, they produce no chemicals except nicotine.

However, since E-cigarettes contain lower nicotine a typical smoker will have to smoke more of these than traditional cigarettes for 'satisfaction'. Also, easier access to smoking (through cigarette sticks/pods) drives increased consumption. For some smokers, the oral fixation is important – the eye, mouth, and hand ritual – which an e-cigarette does not provide.

Juul (the largest E-cigarette brand) has made much headway because of the following reasons: (1) unique design, (2) easy portability (3) wide availability of flavours, (4) does not generate any bad odour, which may be the case with other E-cigarette brands, and (5) it does not lead to passive smoking, since the vapour immediately evaporates; other E-cigarette brands have not been able to replicate its success. Mango and mint are the most selling variants amongst Juul’s portfolio.

How are Indian cigarette companies planning to cope with the challenge of E-cigarette Lack of regulations on E-cigarettes in India is actually restricting meaningful offtake as concerned distributors are operating under the fear of being

prosecuted. The central government has commissioned an advisory board to formulate regulations, but emphasis is more on advisories rather than creating a law. The centre plans to leave implementation of laws on state governments, as health is a state subject.

Making a concrete legislation will require investment in research, which India hasn't done so far, since it is a time-consuming process. The USFDA is looking at claims of E-cigarettes being less harmful, but due to its limited history, conclusions about its effect on health are difficult. Some states have banned e-cigarettes, but this has been challenged in courts. The distributor believes state governments will not be able to justify a ban. If E-cigarettes are proved harmful, cigarettes will also have to be banned.

ITC's EON (e-cigarette brand) has failed vs. imported products. The distributor told us that it has been extensively lobbying with state governments to delay regulations on e-cigarettes until it is ready with its new offering.

Some states and E-cigarette outlook Delhi – NCR is the largest market followed by Bangalore, Mumbai, and Pune. He said Delhi NCR has the highest consumption as disposable income

per family is quite high + there is a tendency to try out products that are in vogue.

*JUUL product Whatsapp message doing the rounds* Starter Kits – Rs 6k - contains device, charger, 4 pods (mint, mango, creme, tobacco)

Black basic kit: Rs 4.5k (contains device and charger)

Chargers: Rs 1,000 | skins and cases: Rs 850-1,500 | portable chargers: Rs 2,300

*JUUL PODS* (4 pods in a pack) 5%

Mango-Rs 2,300 | Fruit medley – Rs 2,200 | Creme Brûlée- Rs 2,200 | Cool Cucumber – Rs

2,200 | Virginia Tobacco- Rs 2,000 | Classic Tobacco- Rs 2,000 | Classic Menthol – Rs 2,000 |

Cool Mint-Rs 2,000

ALL pods in stock

Increase in price due to the FDA ban on mango, creme, fruit, cucumber

(available till supply lasts) to retail stores!

*NEW FLAVORS*

1.5k (4 Pods in a pack-Juul Compatible) • Iced Watermelon • Iced Mango • Iced Strawberry

• Iced Pina Colada • Iced Orange • Iced Pineapple • Iced Blueberry • Cappuccino


In Karnataka, sale of E-cigarettes is banned; but one can use E-cigarettes. Bangalore has the highest number of vapers. Here, consumers make their own juice/flavours and are used to bringing products from outside the state.

The cost of vaping in India There are different devices such as open devices / pod systems. Open devices picked up in India initially as they give the 'feeling' of both nicotine

and 'cloud', but customers can try only one flavour in these, and the odour stays in the air for quite a long time.

With pod-based systems, customers can choose from different flavours and the smell / smoke quickly evaporates since it is in vapour form. Vaping (pod) devices cost Rs 5,500 (including 4 pods that are otherwise priced at Rs 2,000). This makes the effective cost of a device Rs 3,500.

Pods come with varying nicotine content – 1.7%, 3%, and 5%. Higher nicotine content, higher the cost; pods with higher nicotine provide the same feeling as smoking (vapers told us).

Customers already using e-cigarette said that 4 E-cigarette pods equal 80 cigarette sticks (assuming KSFT cigarettes priced at Rs 15 each). Clearly, E-cigarettes are more expensive than regular cigarettes - in Mumbai, 4 pods cost Rs 2,000-2,500 (depending on the flavour) which is almost twice the best-quality cigarette (Rs 15 per cigarette * 80 cigarette = Rs 1,200). Pods procured from the US (through travellers, duty free) would cost only Rs 1,200.

Overall ownership costs of smoking (device + pods ) via E-cigarette are quite high, which is restricting offtake in India. With supportive regulations from the government and cigarette companies taking initiatives to drive innovation (device and pods) and focusing on cost efficiencies, this market can explode in the medium term.

RETAIL SECTOR by Ankit Kedia

We organized Phillip Capital’s 1st Annual Retail Conference on 14th March in Mumbai with the theme ‘Disruption in retail through Digital Transformation’. Key takeaways from panel discussion: • Customers from smaller cities were forced to go

online, as they didn’t have a choice (no physical store) and companies didn’t have stores in smaller cities as it didn’t make economic sense to them. Now customers from tier-2 and tier-3 cities are also demanding innovation and products – consumption patterns across metros and tier-2 and 3 customers have similar SKUs and price points. Companies are opening more stores and offering last-mile delivery for all cities and customers.

• The buzz words in retail used to be location, location, location. Now they are technology, technology, technology. Customers demand more variety, personalisation, and customization and use all channels to shop. In order to influence decision-making at every stage of their customers’ purchases, retailers have to stay ahead of their customers’ changing lifestyles and purchase journeys.

• AI (artificial intelligence) is the new electricity. Currently most of the transformation is at the customer end because that has been disrupted the most. Customer data trail is used to offer promotions, personalized services, products, and pricing. Retailers need to look at customers not from the transaction perspective, but from their lifetime value standpoint. They also need to take a 2-3 year view, and not just for one transaction.

• Customers’ demands are compounding every day and their expectations from retailers are only growing across the value chain. This is challenging the traditional retailers’ business models. Newer companies do not have the baggage of any system and distribution channel, which is why they can easily launch new products even as traditional companies are bogged down due to legacy systems. New companies can redefine their channel and product to cater to new customers while old and traditional retailers and brands need to collaborate with new start-ups to learn and become agile to spur their growth.

• Presently, retailers are 10-15 years behind customers in terms of using technology. Sellers need to work harder to stay relevant to customers. While until a few years ago, retailers were solving supply-chain issues, customer-experience problems have taken centre stage now. Retailers need to change their mind-set to take a more longer-term view – presently, they have a QSQT (quarter se quarter tak) mind-set and expect immediate results.


RETROSPECTIVE PERSPECTIVE – by Roshan Sony Snippets

UBER IPO filing – eyes-are-a-popping Uber finally filed its much-anticipated IPO. And the numbers had everyone gasping. Although everybody knew how huge Uber was, to see it all laid out in black and white

did leave people lightheaded. The San Francisco-based former start-up made 1.5bn trips in just Q4 2018, with people paying US$ 41.5bn for Uber rides in 2018 alone, up 32% from 2017. Out of this, Uber’s revenue was US$ 9.2bn. The company plans to raise US$ 20bn from its IPO. India is a key market for the firm – it was mentioned 24 times in its offer document. In fact, its cash-paid trips feature was rolled out in India first and is now available in 50 countries. Uber defines its addressable market (total, global) for ride-hailing at a whopping US$ 5.7tn, meal-delivery market at US$ 800bn, and the freight brokerage industry at US$ 72bn, which doesn’t include US$ 700bn spent on trucking each year in the US (Uber is looking at a share of that pie too).

From authoritarianism to democracy? Algeria: President Abdelaziz Bouteflika of Algeria stepped down after 20 years in power following weeks of protests. People were unhappy about unemployment and corruption under his regime. He was also accused of political repression and censorship. Recent changes in the Arab world include authoritarian regimes toppling in Egypt, Libya, Tunisia, and Yemen.

Sudan? President Omar al-Bashir fell exactly the way he rose to power 30 years ago – with a military coup. The military council has pledged elections in two years, but the people of Sudan want a democracy established immediately and are protesting.

Sudan began exporting crude oil in the last quarter of 1999 and today oil is an important export industry there. Much of Sudan’s population remains poor with the country going through the Darfur conflict and two decades of civil war. Sudan was subject to comprehensive US sanctions, which were lifted in October 2017.

Could this be the beginning of the end for Edrogan? Either that or a move towards more authoritarianism. Turkish President Recep Tayyip Erdogan did not accept his party’s defeat in local elections in Istanbul and could call for a rerun of the vote. This is considered by many a high-risk move that could undermine his 16-year hold on the transcontinental nation. In 2017 voters approved constitutional amendments changing Turkey from a parliamentary to a presidential system.

The Brexit saga continues Here is where it is for now: UK PM Theresa May asked the EU for an extension until June 30 to work out Brexit. EU leaders met for an emergency summit and granted an extension to October 31st. EU Council President Donald Tusk wants to give a more generous extension of one year but every EU nation has to agree on any new timeline and if that does not happen, Brexit could take place without a deal. In any case, if the UK does not hold European Parliament elections, its membership ceases on 1st June without a deal.

Rattling the cages: OBOR in Latin America OBOR (One Belt One Road) is Chinese President Xi Jinping’s signature

foreign initiative. Under OBOR, China is building railways, ports, power plants and other projects in dozens of countries around the globe. Its focus on Panama, specifically, has alarmed the US considerably because of the country’s strategic importance in

trade. Panama, too, is likely to tread cautiously in terms of accepting Chinese investment – it will try and avoid conflict with the US. So far, Venezuela is believed to have received US$ 62bn in Chinese loans, Brazil US$ 42bn, and Argentina US$ 18bn under OBOR. Mexico has said it would consider joining OBOR while Trinidad and Tobago came on board last year. Belt and Road, as China prefers to call it, has rolled out projects in Africa (Djibouti, Ethiopia, Kenya, Nigeria, and Sudan), Europe (Armenia, Greece, Italy, Luxembourg), and Asia (Hong Kong, Indonesia, Laos, Malaysia, Pakistan, Sri Lanka, and Thailand). It is seen as China’s bid to increase its dominance in global trade and establish a China-centric trade network.


News round-up of the month

M A R C H

INDIA India successfully tests an

anti-satellite missile to

destroy an orbiting satellite at

an altitude of almost 300km.

Karnataka’s transport

department suspends Ola’s

cab-aggregator licence for six months.

SEBI tells Singh brothers to return Rs 4bn to

Fortis; bars asset sales until then.

Mukesh Ambani clears Rs 4.5bn owed by

younger brother Anil Ambani’s RCOM to

Ericsson.

Nirav Modi is arrested in London.

L&T announces a Rs 110bn uninvited bid for

Mindtree.

Manohar Parrikar, four-time Goa CM and ex-

defence minister, passes away.

Retired Supreme Court judge Justice Pinaki

Chandra Ghose becomes India’s first

anticorruption ombudsman (Lokpal).

Four Indians and three persons of Indian origin

among 49 killed in attacks on two mosques in

Christchurch, New Zealand.

Jet Airways’ woes escalate. Eventually, mid April,

five companies were believed to have bid for a

majority stake in the cash-strapped airline. It

faces a shutdown if emergency funding is not

approved.

Investors led by BlackRock could buy HCC’s

litigation claims for Rs 17.5bn.

INTERNATIONAL President Trump says US will recognize Israel's

sovereignty over Golan Heights.

Another antitrust fine for Google from the EU.

This latest one is for US$ 1.7bn (US$ 5bn and

US$ 2.7bn earlier).

NASA reports it detected a huge meteor

explosion in the Earth's atmosphere on

December 18, 2018, above Russia's Kamchatka

Peninsula. It was ten times more powerful than

the atomic bomb dropped on Hiroshima and

the second largest of its kind in 30 years.

The Walt Disney Company completes its US$

71.3bn acquisition of 21st Century Fox's film

and TV assets.

Mueller finds no Trump-Russia collusion.

A P R I L

INDIA

Lok Sabha polls begin. Schedule: 11th April – 91

seats (out of 543), 18th April – 97, 23rd April –

115, 29th April – 71, 6th May – 51, 12th May –

59, and 19th May – 59.

Food inflation falls to lowest level since 1991.

Industrial output growth falls to a 20-month low

in February, while retail inflation rises

sequentially in March.

SC orders Arcelor to stop payment for the Essar

Steel buy, delaying Lakshmi Mittal’s entry.

RBI cuts rate for the second time in two months;

repo rate at 6% from 6.25% earlier. Cuts FY19

growth forecast to 7.2% from 7.4% earlier citing

global headwinds and a slowdown in private

and public consumption.

SBI cuts home loan rates by 10bps and return

on savings bank deposits over Rs 100,000 by

25bps to 3.25%.

IMF cuts India growth forecast for 2019-20 to

7.3%.

Private weather forecaster Skymet says

monsoons to be below normal. IMD predicts

near normal rains.

90% of the Rs 188bn assets of I-Fin, IL&FS’

financial-service subsidiary, are non-performing.

Videocon bankruptcy: Banks and other creditors

may lose as much as Rs 900bn.

In the 2019 Lok Sabha elections, Rahul Gandhi

to contest from Wayanad in Kerala, besides his

usual Amethi.

INTERNATIONAL Historic: Congress votes 247-175 to end US

military assistance to Saudi Arabia in the Yemen

War. Resolution likely to be vetoed by President

Trump.

Russia opens a helicopter training facility in

Venezuela.

Boeing apologizes for the loss of lives in the two

737 MAX accidents.

The first ever photograph of the event horizon of

a black hole is captured.

WikiLeaks founder Julian Assange is arrested in

London after Ecuador withdraws asylum.

Israeli PM Benjamin Netanyahu is re-elected for

a fifth term amid three graft cases.

A fungus, Candida Auris, spreads quietly across

the globe; preys on people with weakened

immune systems.

Former Maldives President returns to power

with a landslide victory.

IMF cuts India growth forecast for 2019-20 to

7.3%.

Australian Bureau of Meteorology says 70%

chance of El Nino in the East Equatorial Pacific.

Key indicators Sensex Rising

Gold Steady

Rupee Steady

10-year G-Sec Rising

Retail inflation Rising

Interest rate Lower

Current account deficit Widening

IIP Lower

Business confidence Lower

Manfuacturing PMI Lower

Services PMI Lower

Consumer confidence Rising

Forex reserves Rising

Gold reserves (physical) Rising

Exports Rising

Imports Rising

Car production Lower

Car registrations Rising

Aluminium Lower

Copper Steady

Zinc Rising


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