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India Equity Research Reports, IPO and Stock News
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Unconventional Insights
We recently organised an investor interaction with eight dealers from
different sectors across India. The trade participants expressed
confidence in future growth in most cases (ex-cement), interestingly,
with strong positive feedbacks on tier II/III town. The competition has
been rising in most segments, but, was not concerning in the context of
growing market. Rising costs, retaining manpower and supply chain
issues were highlighted as key worries by most dealers.
Reinforcing India’s consumption story; tier II/III centres gaining prominence
q Most of the dealers sounded positive on the current growth rates with an equally
optimistic outlook reinforcing our positive stance on India’s consumption story.
q On the expected lines, auto and cement dealer highlighted tier II/III centres as an
important growth driver in the two sectors.
q We were however pleasantly surprised with a strong demand trend for discretionary
products (like jewellery) as well from these centres.
q Liquor too should continue to be a beneficiary of rising affluence, growing social
acceptability as volumes are likely to rise in double digits over the next 5-7 years.
q The residential property market remains weak in Mumbai while other centres have
been witnessing good absorption rates, a trend also seen in the mortgage market.
Mixed view on the impact of competition
q Rise in competition did not seem to be a concern in case of auto as well as
consumer stables given the strong industry growth rates.
q While the high level of regulations makes business difficult for the tobacco and
liquor industry in general, these also act as a huge entry barriers.
q Despite supply pressures and demand slowdown in south India, the outlook on
cement pricing had been stable, thanks to producer discipline.
q Margins in case of jewellery segment have however been under pressure due to
stiff competition in the segment. For example, margins for Solitaire has compressed
to just 5-10% with aggressive product pricing by competition.
Key worries: manpower, rising costs, supply chain
q Retention of staff is increasingly becoming a challenge across sectors; employment
schemes like MGNREGA too have led to labour shortages in rural India.
q Managing seamless logistics was another challenge highlighted by dealers.
q Rising costs (salary, transportation, overheads etc) have been impacting margins
and a few dealers expressed the concerns on the viability of the business model.
q For example, a consumer dealer in Mumbai possibly could derive better returns by
leasing the warehouse/office instead of carrying on existing business.
Key message
Sector On the ground Key concern Did you know?
Auto Robust growth in tractors and 2Ws Labor supply, high property prices
HMSI has 4 dealers in Bhubaneswar cf. 2 each
for Hero Honda and Bajaj
Financial Retail individuals willing to pay for
financial advisory services
Mortgage demand in Mumbai will be
affected by low-affordability
Online investments may cost half the rack rate
Tobacco (ITC) Limited competitive pressures Rising taxes (VAT)
After VAT increase, ITC has taken price hike in
cigarette in TN by reducing trade margin
Real Estate Healthy absorption rates in the (ex-
Mumbai) market
Oversupply position in certain places in
Retail segment, Mumbai residential
70+% of all India supply is in
'affordable' price point where demand is robust
Liquor Growing social acceptability Government regulations Entire Maharashtra has just 5k liquor licenses
Consumer Strong industry growth rates Rising costs, retaining staff Opportunity cost of real estate higher than
current returns made in business
Cement Pricing discipline to help Weak demand environment Telangana region is ~30% of Andhra Pradesh
demand base
Retail Strong growth in Tier-II and III cities
Introduction of PAN disclosure for
purchase above Rs0.5m
Someone in India bought a diamond worth
Rs2.3m online
Auto (John Deere tractor; Bhubaneswar)
q The demand environment for tractors in Orissa is robust and the dealer is expecting
20%+ industry growth in FY12.
q While the financing cost has gone up over the past quarter, there are no signs of
moderation yet. PSU banks are financing tractors at 14% while private banks are
financing at 18%.
q The main reason for the strong tractor demand is a shortage of manual labour on
farms (partly due to NREGA) and pick up in construction activity since tractors are
increasingly being used for transporting construction material.
q He mentioned that dealer margins have gone up a lot in recent years. Tractor
dealers typically share part of their margins with farmers so that the farmer can
pay a down-payment for a loan and later avail of a tractor subsidy from the state
government (Rs90,000 per tractor in Orissa) to keep margins stable.
q The dealer said that John Deere tractors have better technology than M&M tractors
and are more fuel efficient and have lower maintenance costs as well. Earlier there
was a price difference between M&M and John Deere, which has closed now.
q Despite this, M&M has more than 45% market share in Orissa due to its superior
sales and distribution network and the support of Mahindra finance, which gives
them a competitive edge.
q The dealer also mentioned that M&M’s low-cost tractor ‘Yuvraj’ has not received a
good response in Orissa
Auto (Bajaj Auto; Bhubaneswar)
q The demand environment for 2Ws is also very strong and there are no signs of
moderation in the Orissa market.
q Hero Honda is the dominant player in Orissa with more than 80% market share
while Bajaj has just 15% market share.
q 60% of the dealers’ sales are via upfront cash payment while 40% of sales are
financed.
q The dealer expects HMSI to target the 100cc commuter segment in coming years
and expects HMSI to focus on premium bikes only much later.
q HMSI is also aggressively expanding its dealer network in Orissa. HMSI now has 4
dealers in Bhubhaneshwar district versus 2 dealers each for Hero Honda, Bajaj and
TVS Motor.
q The dealer was optimistic on the prospects of Bajaj’s soon-to-be-launched ‘Boxer-
150cc’ bike and believes that there is a genuine need in rural areas for a rugged
bike with higher power at the price of a 100cc bike, which can be met by Bajaj’s
new bike.
Financial (Direct Selling Agent; Mumbai)
q Insurance / Mutual funds - Non ULIP demand is picking up and agents are charging
fees to customers directly based on AUM (a very big mindset shift)
q SIP (Systematic Investment Plan) and term insurance is catching-up. Online is
getting popular and may cost 50% lower than agency based.
q Currently, interest in short-term money market investments is high (arguably due
to the inverted yield curve and risk aversion).
q Online penetration is growing and now some independent financial advisors (IFA)
are looking to set-up online platform.
q Mortgage Loans – Banks are not offering discount on rack rates and most have
even scaled up fees. Mumbai property market volumes are down sharply (prices are
unaffordable) and if left to pure demand –supply equation, prices could fall 20%.
q Mumbai residential property market suffers from low-affordability and middle class
people are unable to find quality property at affordable price. Over the past few
years, volume of transactions is down and ticket sizes have increased significantly,
but still value of transactions down.
q SME financing – huge scope but only few banks seem to be focussing on this
segment.
q Over the past 1-2 years, the rate negotiations have become negligible and
transparency has improved. Almost no bank offers a discount over card rate and
some have raised fees.
Tobacco & Consumer (ITC; Chennai)
q Post the recent rise in VAT rates to 20% in the state of Tamil Nadu, ITC has taken
price hikes by squeezing trade margins in few SKUs even while maintaining MRP.
Some retailers would like start selling the sticks above the MRP.
q While there had been rise in competition from Godrey Philip in the last one year, its
impact has been limited and ITC had responded to the competition well. Retailers
have benefitted in the fight as both has spent money.
q There has been a steep learning curve in case of new FMCG business and the foods
basket has been showing rapid growth improving profitability; the inventory days in
the new FMCG are down from >30 days till a few years back to 20 days now. But
the bigger worry is retail credit. The overall distributor investment is still about 35-
40 days in the FMCG business. In cigarettes, total investment is about 10 days.
q Recently launched ‘Sunfeast Yipee’ noodles are gaining good traction and in fact,
the company has been facing supply constraints.
q There have supply issues in ‘Bingo’ chips as well as the products take time to reach
south from the facility in north.
q The personal care would however take time due to stiff competition. For example,
the market leader reacted strongly to ITC’s fairness cream, ‘Vivel Active Fair.
q Additionally, in Vivel soaps there has been sales pick-up around a new promotion
but sales drop once the promotion is withdrawn.
q However, ITC is committed to grow its non-cigarette portfolio, including personal
care. Out of the three brands, ‘Vivel Di Wills’ is gaining maximum traction.
q Organised retail is handled by dealers except for Reliance/Metro by ITC directly.
q ITC pays 1.8% dealer margins and all the operating costs are reimbursed by the
company. In contrast, HUL pays distributor a margin of ~5% but the distributor is
supposed to take care of all costs. This makes HUL distributors more cost conscious
cf. ITC dealers who are not incentivized to optimize costs as much.
q HUL has worked quite efficiently on the distributor inventory reduction and many
distributors in the urban areas are now serviced almost daily and work on almost ‘0’
inventory. Consequently, they have cut the margins in such cases.
Real Estate (Jones Lang LaSalle; pan India)
q Indian residential property market, ex of Mumbai, continues to post good
absorption rates (15%+/quarter).
q On an all India basis, 70-80% of the supply is in the
price point where demand continues to be robust. Key markets of Gurgaon and
Bangalore continue to post steady sales.
q The area of slowdown has been the higher end or >Rs10,000/sf market (almost
entirely in Mumbai). In Mumbai, absorption rates have dipped in single digits now
for the past two quarters.
q The local government in Mumbai is still shy of approving real estate projects.
Consequently, new project launches have been low (down 36% YoY in 1HCY11)
leading to low absorption. New supply is expected to trigger a price correction
which should trigger renewed sales momentum.
q Office property is a bright spot with demand in CY11 expected to be a record 40m
sf, against a 30m sf average over the past few years. Bangalore and NCR lead with
9-10m sf demand expected in CY11. Mumbai should account for 5-6m sf.
q While supply of 61m sf is possible in CY11 (subject to delays); good quality/well
located supply is incrementally getting exhausted leading to rising rentals in most
cities.
q Rentals are expected to strengthen further in Bangalore, Central Gurgaon and
select locations in Mumbai (BKC) & Delhi CBD.
q Retail has seen oversupply conditions in NCR, Mumbai (ex-island city) and Pune.
Hyderabad, Bangalore and Kolkata are seeing tighter retail supply.
q A short supply is likely to be seen in retail over the next 2-3 years as fresh
investments in the sector have been very low since 2009.
Liquor industry expert (Mumbai)
q Liquor industry volumes have witnessed strong growth in last few years and over
the next 5-7 years, the trend of double digit volume growth is likely to continue.
q Growing social acceptability is the driver of this trend along with factors like rising
income, favourable demographics etc.
q While Maharashtra government has raised drinking age to 25 years, the
implementation of the law would be a challenge.
q Following a sharp rise in taxes, liquor prices are up ~50%. This resulted in ~10%
industry volume de-growth in last few months (higher impact at mass-end).
q There have also been signs of downtrading within IMFL; no downtrading to country
liquor, though.
q Interestingly, Maharashtra state volumes should likely end flat in FY12. If this
happens, would still be commendable in the context of tax increases, in our view.
q While competition has been rising, including from imported brands etc., it is not a
big concern considering the rapid growth that the industry has been witnessing.
q Distribution remains a key challenge with high government controls; there have not
been any increase in retail licenses for spirits (some beer only licenses have been
issued) in Maharashtra in over a decade except in case of restaurants/ bars.
Consumer staple (Reckitt Benckiser & L’Oreal; Mumbai)
q There has been a strong growth rates in the portfolio of two companies with Reckitt
growing at ~20% and L’Oreal growing at 30%.
q The penetration led growth too has been driving this, particularly in case of
relatively new entrant, L’Oreal. For example, the dealer has increased coverage
from 150 stores to 650 stores for L’Oreal products over the last two years.
q Dettol antiseptic continues to be the largest selling product followed by Harpic toilet
cleaners and Dettol soaps in the Reckitt portfolio.
q Entry of Kolestain (P&G) has helped in market growth which has benefitted L’Oreal.
q L’Oreal has been investing significantly behind its portfolio and apparently has
highest ad spends as a percentage of revenues.
q Supply chain has been an issue in case of Reckitt (hand washes/ antiseptic) in the
past; Reckitt is still finalising its strategy for recently acquired Paras.
q From a seven day credit, Reckitt has moved to cash and carry model (RTGS).
Consequently, there is no credit offered by dealer to retail. L’Oreal continues to
offer seven day credit but is expected to move to cash once it attains critical mass.
q The challenges in distribution businesses have been rising, particularly staff
retention. Interestingly, the dealer indicated that the opportunity cost for a real
estate premise in Mumbai is higher cf. returns made in current business.
Cement (south India)
q Demand growth trend in south, remains weak, particularly in the state of Andhra
Pradesh.
q Demand from infra remains sluggish in Andhra Pradesh, which in the past had been
a key cement growth driver; limited demand from projects like irrigation/ social
housing etc.
q Political unrest in Telangana region (~30% of Andhra Pradesh) too has impacted.
q With new government in place, the infra activity is likely to pick up in the state of
Tamil Nadu, while, it is likely to stay weak in Andhra in the medium term.
q Real estate sector has also been witnessing a slowdown. Interestingly, tier II/III
cities/ towns have been witnessing good construction activity.
q Despite supply pressures (coupled with demand slowdown), cement prices have
remained fairly stable, thanks to producer discipline which is expected to continue.
q Demand-supply imbalance would however to continue for another eight quarters.
q While the focus is in general on the firm prices in the recent past, it has to be seen
in the context of cost pressures that the industry has been facing.
q M&A is bound to happen in the cement industry.
q Retaining manpower is the key challenge in the cement distribution business.
Retail (High-end jewellery designer; pan India)
q Surge in demand is witnessed by high-end luxury jewellery provider in Mumbai.
Surprisingly, he is seeing strong growth from Tier II and Tier III cities like Kanpur,
Ludhiana, Chandigarh and Hyderabad.
q Spending power has significantly increased in these cities. He used to do an annual
2 shows (jewellery display of his collection) in Delhi, but for the past two years he
is focussing more on Tier II and III cities.
q Demand for jewellery is impulse in India - specially bridal market. In hierarchy of
things, buyers are giving first preference to product design, quality, then the brand,
then price and later on resale-investment value. Something which is not seen
before.
q Typical margins in the business are under pressure due to growing competition in
the business.
q While for designer pieces the margins are somewhere closer to 15-25%, a plain
solitaire, the margins are somewhere between 5-10% only.
q There is rising competition from online retailers like caratlanes.com which India's
largest online jewellery store. The online portal is already targeting annual sales of
US$30m in FY12 and growing at very high rate. The portal recently got PE funding
of US$6m from Tiger Global.
q The dealer indicated that Tanishq (jewellery brand of Titan) has been enjoying
higher mark-ups on their products compared to traditional jewellers in the country.
q Payment is received in mix of cash and cheque. Cash business as a proportion of
overall business has reduced over past few years.
q The new rule requiring submission of PAN card for purchases over Rs500,000 is a
worry
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Unconventional Insights
We recently organised an investor interaction with eight dealers from
different sectors across India. The trade participants expressed
confidence in future growth in most cases (ex-cement), interestingly,
with strong positive feedbacks on tier II/III town. The competition has
been rising in most segments, but, was not concerning in the context of
growing market. Rising costs, retaining manpower and supply chain
issues were highlighted as key worries by most dealers.
Reinforcing India’s consumption story; tier II/III centres gaining prominence
q Most of the dealers sounded positive on the current growth rates with an equally
optimistic outlook reinforcing our positive stance on India’s consumption story.
q On the expected lines, auto and cement dealer highlighted tier II/III centres as an
important growth driver in the two sectors.
q We were however pleasantly surprised with a strong demand trend for discretionary
products (like jewellery) as well from these centres.
q Liquor too should continue to be a beneficiary of rising affluence, growing social
acceptability as volumes are likely to rise in double digits over the next 5-7 years.
q The residential property market remains weak in Mumbai while other centres have
been witnessing good absorption rates, a trend also seen in the mortgage market.
Mixed view on the impact of competition
q Rise in competition did not seem to be a concern in case of auto as well as
consumer stables given the strong industry growth rates.
q While the high level of regulations makes business difficult for the tobacco and
liquor industry in general, these also act as a huge entry barriers.
q Despite supply pressures and demand slowdown in south India, the outlook on
cement pricing had been stable, thanks to producer discipline.
q Margins in case of jewellery segment have however been under pressure due to
stiff competition in the segment. For example, margins for Solitaire has compressed
to just 5-10% with aggressive product pricing by competition.
Key worries: manpower, rising costs, supply chain
q Retention of staff is increasingly becoming a challenge across sectors; employment
schemes like MGNREGA too have led to labour shortages in rural India.
q Managing seamless logistics was another challenge highlighted by dealers.
q Rising costs (salary, transportation, overheads etc) have been impacting margins
and a few dealers expressed the concerns on the viability of the business model.
q For example, a consumer dealer in Mumbai possibly could derive better returns by
leasing the warehouse/office instead of carrying on existing business.
Key message
Sector On the ground Key concern Did you know?
Auto Robust growth in tractors and 2Ws Labor supply, high property prices
HMSI has 4 dealers in Bhubaneswar cf. 2 each
for Hero Honda and Bajaj
Financial Retail individuals willing to pay for
financial advisory services
Mortgage demand in Mumbai will be
affected by low-affordability
Online investments may cost half the rack rate
Tobacco (ITC) Limited competitive pressures Rising taxes (VAT)
After VAT increase, ITC has taken price hike in
cigarette in TN by reducing trade margin
Real Estate Healthy absorption rates in the (ex-
Mumbai) market
Oversupply position in certain places in
Retail segment, Mumbai residential
70+% of all India supply is in
'affordable' price point where demand is robust
Liquor Growing social acceptability Government regulations Entire Maharashtra has just 5k liquor licenses
Consumer Strong industry growth rates Rising costs, retaining staff Opportunity cost of real estate higher than
current returns made in business
Cement Pricing discipline to help Weak demand environment Telangana region is ~30% of Andhra Pradesh
demand base
Retail Strong growth in Tier-II and III cities
Introduction of PAN disclosure for
purchase above Rs0.5m
Someone in India bought a diamond worth
Rs2.3m online
Auto (John Deere tractor; Bhubaneswar)
q The demand environment for tractors in Orissa is robust and the dealer is expecting
20%+ industry growth in FY12.
q While the financing cost has gone up over the past quarter, there are no signs of
moderation yet. PSU banks are financing tractors at 14% while private banks are
financing at 18%.
q The main reason for the strong tractor demand is a shortage of manual labour on
farms (partly due to NREGA) and pick up in construction activity since tractors are
increasingly being used for transporting construction material.
q He mentioned that dealer margins have gone up a lot in recent years. Tractor
dealers typically share part of their margins with farmers so that the farmer can
pay a down-payment for a loan and later avail of a tractor subsidy from the state
government (Rs90,000 per tractor in Orissa) to keep margins stable.
q The dealer said that John Deere tractors have better technology than M&M tractors
and are more fuel efficient and have lower maintenance costs as well. Earlier there
was a price difference between M&M and John Deere, which has closed now.
q Despite this, M&M has more than 45% market share in Orissa due to its superior
sales and distribution network and the support of Mahindra finance, which gives
them a competitive edge.
q The dealer also mentioned that M&M’s low-cost tractor ‘Yuvraj’ has not received a
good response in Orissa
Auto (Bajaj Auto; Bhubaneswar)
q The demand environment for 2Ws is also very strong and there are no signs of
moderation in the Orissa market.
q Hero Honda is the dominant player in Orissa with more than 80% market share
while Bajaj has just 15% market share.
q 60% of the dealers’ sales are via upfront cash payment while 40% of sales are
financed.
q The dealer expects HMSI to target the 100cc commuter segment in coming years
and expects HMSI to focus on premium bikes only much later.
q HMSI is also aggressively expanding its dealer network in Orissa. HMSI now has 4
dealers in Bhubhaneshwar district versus 2 dealers each for Hero Honda, Bajaj and
TVS Motor.
q The dealer was optimistic on the prospects of Bajaj’s soon-to-be-launched ‘Boxer-
150cc’ bike and believes that there is a genuine need in rural areas for a rugged
bike with higher power at the price of a 100cc bike, which can be met by Bajaj’s
new bike.
Financial (Direct Selling Agent; Mumbai)
q Insurance / Mutual funds - Non ULIP demand is picking up and agents are charging
fees to customers directly based on AUM (a very big mindset shift)
q SIP (Systematic Investment Plan) and term insurance is catching-up. Online is
getting popular and may cost 50% lower than agency based.
q Currently, interest in short-term money market investments is high (arguably due
to the inverted yield curve and risk aversion).
q Online penetration is growing and now some independent financial advisors (IFA)
are looking to set-up online platform.
q Mortgage Loans – Banks are not offering discount on rack rates and most have
even scaled up fees. Mumbai property market volumes are down sharply (prices are
unaffordable) and if left to pure demand –supply equation, prices could fall 20%.
q Mumbai residential property market suffers from low-affordability and middle class
people are unable to find quality property at affordable price. Over the past few
years, volume of transactions is down and ticket sizes have increased significantly,
but still value of transactions down.
q SME financing – huge scope but only few banks seem to be focussing on this
segment.
q Over the past 1-2 years, the rate negotiations have become negligible and
transparency has improved. Almost no bank offers a discount over card rate and
some have raised fees.
Tobacco & Consumer (ITC; Chennai)
q Post the recent rise in VAT rates to 20% in the state of Tamil Nadu, ITC has taken
price hikes by squeezing trade margins in few SKUs even while maintaining MRP.
Some retailers would like start selling the sticks above the MRP.
q While there had been rise in competition from Godrey Philip in the last one year, its
impact has been limited and ITC had responded to the competition well. Retailers
have benefitted in the fight as both has spent money.
q There has been a steep learning curve in case of new FMCG business and the foods
basket has been showing rapid growth improving profitability; the inventory days in
the new FMCG are down from >30 days till a few years back to 20 days now. But
the bigger worry is retail credit. The overall distributor investment is still about 35-
40 days in the FMCG business. In cigarettes, total investment is about 10 days.
q Recently launched ‘Sunfeast Yipee’ noodles are gaining good traction and in fact,
the company has been facing supply constraints.
q There have supply issues in ‘Bingo’ chips as well as the products take time to reach
south from the facility in north.
q The personal care would however take time due to stiff competition. For example,
the market leader reacted strongly to ITC’s fairness cream, ‘Vivel Active Fair.
q Additionally, in Vivel soaps there has been sales pick-up around a new promotion
but sales drop once the promotion is withdrawn.
q However, ITC is committed to grow its non-cigarette portfolio, including personal
care. Out of the three brands, ‘Vivel Di Wills’ is gaining maximum traction.
q Organised retail is handled by dealers except for Reliance/Metro by ITC directly.
q ITC pays 1.8% dealer margins and all the operating costs are reimbursed by the
company. In contrast, HUL pays distributor a margin of ~5% but the distributor is
supposed to take care of all costs. This makes HUL distributors more cost conscious
cf. ITC dealers who are not incentivized to optimize costs as much.
q HUL has worked quite efficiently on the distributor inventory reduction and many
distributors in the urban areas are now serviced almost daily and work on almost ‘0’
inventory. Consequently, they have cut the margins in such cases.
Real Estate (Jones Lang LaSalle; pan India)
q Indian residential property market, ex of Mumbai, continues to post good
absorption rates (15%+/quarter).
q On an all India basis, 70-80% of the supply is in the
price point where demand continues to be robust. Key markets of Gurgaon and
Bangalore continue to post steady sales.
q The area of slowdown has been the higher end or >Rs10,000/sf market (almost
entirely in Mumbai). In Mumbai, absorption rates have dipped in single digits now
for the past two quarters.
q The local government in Mumbai is still shy of approving real estate projects.
Consequently, new project launches have been low (down 36% YoY in 1HCY11)
leading to low absorption. New supply is expected to trigger a price correction
which should trigger renewed sales momentum.
q Office property is a bright spot with demand in CY11 expected to be a record 40m
sf, against a 30m sf average over the past few years. Bangalore and NCR lead with
9-10m sf demand expected in CY11. Mumbai should account for 5-6m sf.
q While supply of 61m sf is possible in CY11 (subject to delays); good quality/well
located supply is incrementally getting exhausted leading to rising rentals in most
cities.
q Rentals are expected to strengthen further in Bangalore, Central Gurgaon and
select locations in Mumbai (BKC) & Delhi CBD.
q Retail has seen oversupply conditions in NCR, Mumbai (ex-island city) and Pune.
Hyderabad, Bangalore and Kolkata are seeing tighter retail supply.
q A short supply is likely to be seen in retail over the next 2-3 years as fresh
investments in the sector have been very low since 2009.
Liquor industry expert (Mumbai)
q Liquor industry volumes have witnessed strong growth in last few years and over
the next 5-7 years, the trend of double digit volume growth is likely to continue.
q Growing social acceptability is the driver of this trend along with factors like rising
income, favourable demographics etc.
q While Maharashtra government has raised drinking age to 25 years, the
implementation of the law would be a challenge.
q Following a sharp rise in taxes, liquor prices are up ~50%. This resulted in ~10%
industry volume de-growth in last few months (higher impact at mass-end).
q There have also been signs of downtrading within IMFL; no downtrading to country
liquor, though.
q Interestingly, Maharashtra state volumes should likely end flat in FY12. If this
happens, would still be commendable in the context of tax increases, in our view.
q While competition has been rising, including from imported brands etc., it is not a
big concern considering the rapid growth that the industry has been witnessing.
q Distribution remains a key challenge with high government controls; there have not
been any increase in retail licenses for spirits (some beer only licenses have been
issued) in Maharashtra in over a decade except in case of restaurants/ bars.
Consumer staple (Reckitt Benckiser & L’Oreal; Mumbai)
q There has been a strong growth rates in the portfolio of two companies with Reckitt
growing at ~20% and L’Oreal growing at 30%.
q The penetration led growth too has been driving this, particularly in case of
relatively new entrant, L’Oreal. For example, the dealer has increased coverage
from 150 stores to 650 stores for L’Oreal products over the last two years.
q Dettol antiseptic continues to be the largest selling product followed by Harpic toilet
cleaners and Dettol soaps in the Reckitt portfolio.
q Entry of Kolestain (P&G) has helped in market growth which has benefitted L’Oreal.
q L’Oreal has been investing significantly behind its portfolio and apparently has
highest ad spends as a percentage of revenues.
q Supply chain has been an issue in case of Reckitt (hand washes/ antiseptic) in the
past; Reckitt is still finalising its strategy for recently acquired Paras.
q From a seven day credit, Reckitt has moved to cash and carry model (RTGS).
Consequently, there is no credit offered by dealer to retail. L’Oreal continues to
offer seven day credit but is expected to move to cash once it attains critical mass.
q The challenges in distribution businesses have been rising, particularly staff
retention. Interestingly, the dealer indicated that the opportunity cost for a real
estate premise in Mumbai is higher cf. returns made in current business.
Cement (south India)
q Demand growth trend in south, remains weak, particularly in the state of Andhra
Pradesh.
q Demand from infra remains sluggish in Andhra Pradesh, which in the past had been
a key cement growth driver; limited demand from projects like irrigation/ social
housing etc.
q Political unrest in Telangana region (~30% of Andhra Pradesh) too has impacted.
q With new government in place, the infra activity is likely to pick up in the state of
Tamil Nadu, while, it is likely to stay weak in Andhra in the medium term.
q Real estate sector has also been witnessing a slowdown. Interestingly, tier II/III
cities/ towns have been witnessing good construction activity.
q Despite supply pressures (coupled with demand slowdown), cement prices have
remained fairly stable, thanks to producer discipline which is expected to continue.
q Demand-supply imbalance would however to continue for another eight quarters.
q While the focus is in general on the firm prices in the recent past, it has to be seen
in the context of cost pressures that the industry has been facing.
q M&A is bound to happen in the cement industry.
q Retaining manpower is the key challenge in the cement distribution business.
Retail (High-end jewellery designer; pan India)
q Surge in demand is witnessed by high-end luxury jewellery provider in Mumbai.
Surprisingly, he is seeing strong growth from Tier II and Tier III cities like Kanpur,
Ludhiana, Chandigarh and Hyderabad.
q Spending power has significantly increased in these cities. He used to do an annual
2 shows (jewellery display of his collection) in Delhi, but for the past two years he
is focussing more on Tier II and III cities.
q Demand for jewellery is impulse in India - specially bridal market. In hierarchy of
things, buyers are giving first preference to product design, quality, then the brand,
then price and later on resale-investment value. Something which is not seen
before.
q Typical margins in the business are under pressure due to growing competition in
the business.
q While for designer pieces the margins are somewhere closer to 15-25%, a plain
solitaire, the margins are somewhere between 5-10% only.
q There is rising competition from online retailers like caratlanes.com which India's
largest online jewellery store. The online portal is already targeting annual sales of
US$30m in FY12 and growing at very high rate. The portal recently got PE funding
of US$6m from Tiger Global.
q The dealer indicated that Tanishq (jewellery brand of Titan) has been enjoying
higher mark-ups on their products compared to traditional jewellers in the country.
q Payment is received in mix of cash and cheque. Cash business as a proportion of
overall business has reduced over past few years.
q The new rule requiring submission of PAN card for purchases over Rs500,000 is a
worry
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