02 October 2014

Post Conference Notes - Growth is Returning: Edelweiss PDF link

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We hosted 19 intermediaries across 11 key sectors at Edel Pulse 2014, our unique one-day investor forum meant to provide on-the-ground insights as well as to gauge the demand scenario. The conference was well received with 75 institutions participating leading to 380 meetings.
The overall mood was more upbeat than last year. The investment cycle is picking up, led by mid-size projects. Chemicals, auto components, textiles, defence and pharma segments are doing well. This should eventually flow into better materials (metals and cement) demand. The government is taking select steps to aid growth with diesel deregulation on the cards. Solar power and garmenting offer immense growth potential. In the BFSI space, mortgage finance demand is healthy with growth coming from tier 2/3 cities, while the MFI segment is normalising with stable delinquencies.
On the consumer front, H2FY15 is expected to see revival following better sentiment and urban recovery. Stable INR and lower crude prices are likely to boost margins of consumer companies. Media spends are robust with ~14-15% growth. Real estate remains region-specific with a weak NCR market offset by a stable Bengaluru market.
B2B: Revival on the cards; select steps by government to aid growth
The industrial/manufacturing part of the economy is witnessing pick up in the investment cycle, led by mid-size projects rather than mega projects. The government is taking select steps to aid growth including labour reforms, faster clearances, “MakeinIndia” initiative, improvement in PPP models and better partnership with the states. Knowledge-based industries such as speciality chemicals, pharma and auto components are leading the pick-up. Impact is expected to be visible in Q4FY15. Cement participants expressed confidence on ~8-8.5% p.a. demand growth. Oil & gas may see diesel deregulation soon. Solar power offers immense scope for growth (target capacity of ~100GW) across the value chain with potential for employment generation also. The domestic garmenting space is set for growth, driven by improving relative labour advantage over global competition.
B2C: H2FY15 expected to see pick-up; mortgage finance strong
Intermediaries in consumer segments indicated that after a sluggish H1FY15, H2FY15 is expected to be better, aided by improvement in sentiment, build up to festive season and urban recovery. Also, a stable INR and benign crude oil prices will boost margins of consumer companies. Ad spends in India are likely to grow by a healthy 14-15% YoY in FY15. In BFSI, mortgage finance demand is healthy with growth coming from tier 2/3 cities, while LAP products offer huge potential.  The MFI segment is returning to normalcy in terms of delinquencies. In realty, the NCR market remains weak with the expected Delhi master plan being a key monitorable, while Bengaluru remains stable with prices rising and the right products meeting strong demand.



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BEML - Multiple Growth Drivers: Edelweiss PDF link

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We recently interacted with BEML’s top management to get an update on key businesses. Below is a snapshot of our interaction:
Metro, rail segment to drive top line; margin outlook stable
BEML has a robust INR18bn order book in the rail segment—INR15bn Metro and INR3bn railways. The company has a total manufacturing and supplying of 12-14 rakes in Metro coaches, 120-130 Metro coaches and 5-6 rakes in DEMU category p.a. Indian Railways’ bright investment outlook and meaningful traction in Metro projects in many cities augur well for BEML’s top line. However, management expects EBIDTA margin to sustain at a steady 6-7% level as it is often capped at other state run entities like ICF, RCF etc. BEML indicated that the Railway Board will incrementally cease to award projects on nomination basis and in future embrace the competitive bid route.
Defence: Robust order book outlook; eyeing high margin products
Management expects Tatra issues to be resolved soon, post which BEML will start negotiations with OEMs for future projects. The company has tied up with BAE Systems for light armoured multipurpose vehicles (LAMs), which is expected to be awarded by MoD soon. With an eye on 40% gross margin in the defence business, BEML is focusing on higher value-added products like Pinaca launcher mounted Tatra trucks.
Optimally positioned in mining business; W/C reduction on cards
Armed with an INR16bn order book, BEML expects mining segment deliveries to pick up over the next 3-5 quarters post a weak FY14. Management expects fresh orders also to pick up incrementally and is already L1 in INR6.3bn orders. The company expects finished goods inventory (especially mining) to dip over the next 3-4 quarters, which coupled with strong focus on receivables could help lower working capital in FY15.


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