Ambitious disinvestment programme may struggle to fill hole from lower RBI payout

Ambitious disinvestment programme may struggle to fill hole from lower RBI payout

A significantly lower dividend payment to the government by the RBI prompts us to look once again at the federal fiscal math. This brings us to a pertinent question: can the government’s ambitious disinvestment programme not only reach its target but also make up for lower RBI dividend? In this context, let’s have a look at the status of proceeds from disinvestment programme so far and where we are heading.

Dividend shortfall is 15 percent of non-tax revenue

Last Thursday, RBI declared that this year it would pay Rs 30,659 crore as surplus dividend to government which is less than half the amount it transferred last year. RBI’s dividend transfer of Rs 65,876 crore last year was about 86 percent of the total dividend income from the financial institutions.

In FY18, the budget estimate for the dividend income is Rs 74,901 crore. After RBI’s declaration, shortfall in this category is Rs 44,242 crore, which is 15.3 percent of the non-tax revenue budgeted. As the public sector banks are struggling with higher provisioning and weak fundamentals, a limited contribution is expected in the form of dividends.


Source: Moneycontrol Research

11% of disinvestment target achieved so far

Given this context, we look at another non-tax, non-debt means available for the government in terms of disinvestment to reduce the shortfall. Here, interestingly, government already has a higher target budgeted i.e. Rs 72,500 crore for the FY18 vs Rs 56,500 crore in the last fiscal.


Source: Moneycontrol Research

Disinvestment target includes Rs 46,500 crore from the disinvestment of the government’s equity holdings through minority stake sales (ETF sale route), buybacks, mergers, Rs 15000 crore as the strategic disinvestment (SUUTI route) and listings of insurance companies.

As per the data available from the department of investment and public asset management (DIPAM), divestment so far has been Rs 8,428 crore constituting 11 percent of the target. This includes proceeds of Rs 4154 crore from the disinvestment of SUUTI investment (L&T stake sale). Further, Rs 4274 crore is from the minority sale/listings.


Source: Moneycontrol research

Multipronged disinvestment programme

The government is currently working through following modes to meet th edisinvestment target.

1, Disinvestment through ETF route – Bharat 22: Earlier ETF route for stake sale was deployed through CPSE ETF, which was able to garner Rs 11, 500 crore. Partially primed by its success, Bharat 22 ETF is expected to be major conduit to sell the government’s SUUTI stake as there is 40 percent weightage for the SUUTI heavyweights (L&TITC and Axis Bank).


Source: Moneycontrol Research

Now, broadly looking at SUUTI sale stake at the current price, th egovernment could garner Rs 49,811 crore. As government might do it in tranches and partially through the ETF route, we are keeping an assumption of 50 percent of stake sale for this year.

2, HPCL-ONGC merger: Oil majors’ expected merger and government’s stake sale in HPCL (51 percent) amounts to Rs 33,293 crore which can further aid the government’s fiscal balance, even if it is a transfer from one pocket to the other.

3, Defence companies listing: On the back-of-the-envelope calculation suggest that these defence companies when listed can command a valuation of Rs 29, 850 crore (based on P/E 20x multiple for the industrials sector). As government plans to divest 25 percent stake, Rs 7,395 crore proceeds could be a rough estimate.


Source: Moneycontrol research

4, Insurance companies listing: The government plans to list all the five state-run general insurance companies as well. New India Assurance and GIC are already lined up to raise Rs 20,000 crore, of which about Rs 16,000 crore would go to the government.


Source: Moneycontrol research

Taking all these in to account, the government’s target for the divestment can possibly be reached, and some of the shortfall from dividend income. However, our calculation suggests a net shortfall of about Rs 16,700 crore unless the government decides to sale the entire SUUTI stake or accelerate the listing of PSUs. This could mean a slippage in fiscal deficit target, if everything else remains same, to 3.3 percent compared to 3.2 percent budgeted for 2017-18.

Tata Global’s restructuring initiatives could unlock value for investors

Tata Global’s restructuring initiatives could unlock value for investors

The earnings report from Tata Global Beverage revealed a continuation of improving profitability of its Indian operations and restructuring of the international businesses. Despite GST, the company witnessed growth supported by volumes.

In our view, Tata Global’s latest initiatives on restructuring are directionally positive steps. We believe that the latest developments have the potential to unlock value for the shareholders.

Q1 results aided by better performance of branded business


At the consolidated level, the company posted sales de-growth of -2 percent, wherein underlying constant currency growth was at 1 percent driven by improved performance of its Indian operations. Branded business (Excluding EMEA region) posted sales growth of 5 percent. EMEA (Europe Middle East and Africa) region was impacted by currency volatility post Brexit. However, a major drag on sales was the weak performance of non-branded operations (-10 percent).

Earnings before exceptional item and tax improved 9 percent on account of nearly flattish growth in prices of raw materials, cost management initiatives (lower employee and finance cost) that were partially offset by higher promotional costs.

Positive volume growth in Indian operations


India operations (53 percent of Q1 2018 sales) witnessed sales growth of 9 percent YoY aided by new launches and improved tea volume, although muted volume growth for coffee was a drag. Operating margins benefitted from lower cost of goods sold partially offset by higher advertising cost.

Restructuring on the way

The management stated that company is closely reviewing business verticals and geographies that are not adding value to shareholders. Consequently, the company has made changes in its Russia and China businesses.

In case of Russian operations, Tata Global has decided to transfer ownership and operational responsibility to Skodnya Grand LLC.  Post this transaction, a 5-year renewable licence agreement for its Russian brands would be granted to Tea Trade LLC. While the transaction amount is yet to be disclosed, Tata Global Beverage would receive royalties for the use of its existing brands by the new owner.

What drove this transaction was the muted performance of its Russian entity, difficult macro-economic context and the currency devaluation. It is noteworthy that the Russian business generated sales of Rs 266 crore in the FY17 and a loss after tax of Rs 29 crore.

The company has also sold its stake in its Chinese joint venture Zhejiang Tata Tea Extraction Company Limited. Gains from the disposal on the standalone books would be to the tune of Rs 19 crore.

Investment in greenfield plant in Vietnam

In the post result conference call, management gave an update about a mega project in Vietnam for Tata coffee. The company has invested USD 6 million for the freeze dry instant coffee facility.

The management reiterated its focus on building core brands, premiumisation and the non-black tea segment.

Overall, we find the results positive, particularly on the cost management and restructuring front. Tata Global trades at 24 x (12m trailing earnings) which seems reasonable in the context of the ongoing business restructuring and the dynamic new leadership at the group level hinting at maximizing shareholders value.

Britannia’s focus on cost efficiency, capacity expansion to give it more bite

In a sector weighed down by massive destocking and resultant volume de-growth, Britannia’s Q1 results stand tall with a positive volume growth. Though GST did impact the company’s financials, what caught our attention were the initiatives it took to increase capacity expansion and expand the direct reach in distribution.

Q1 2018: Despite GST, volume growth was positive

Britannia’s Q1 2018 consolidated sales grew by 6 percent, aided by topline growth in domestic business (92 percent of Q1 2018 sales) but was partially impacted by international business. Domestic business benefitted from about 3 percent volume growth despite GST related destocking and witnessed a 7 percent sales growth. International business was impacted by a difficult geopolitical situation in the Middle-East similar to what was reported by other FMCG players.

EBITDA margin for the India business declined by 28 bps impacted by higher raw material and employee costs, partially offset by cost efficiency initiatives and lower advertisement spends.

Britannia’s standalone financials


Increased cost efficiency targets to protect margins

In the recent conference call, the management revised the cost efficiency target for FY18 to 60 percent higher than FY17 savings (from earlier 40 percent). This is expected to result in about Rs 250 crore of savings in FY18. We expect this to help in protecting margins in an environment of intensifying competition.

The management further guided for a double-digit volume growth post GST transition.

Capacity expansion: 16 percent capacity addition expected by end of CY 2019

The company elaborated on its ongoing expansion plans. It is undergoing a capital expenditure of about Rs 400 crore for the current fiscal year mainly for its plants in Mundra (SEZ) and Guwahati.

Both plants are expected to be commissioned by the end of current fiscal year. Capacity expansion on account of these two plants would be about 60,000 MT which is 6 percent of the current in-house capacity.

Britannia has recently announced a mega food park in Ranjangaon, Pune, wherein, capacity addition in the first phase is expected to be 1 lakh tonnes to be completed by end of CY 2019.

Hence, by end of 2019, with the new capacity additions, production mix of in-house to contract manufacturing would change to 65:35 from the current 55:45.

Among other new initiatives, a joint venture with the Greek-based baker, Chipita is likely to fructify in the proposed food park in Pune with the investments to the tune of Rs 85 crore.

Improved retail reach and innovation

Britannia has embarked upon an ambitious distribution expansion. Its direct reach has more than doubled over the past three years. Currently, the direct reach is about 1.56 million (33 percent of total) outlets. The company plans to add 0.2 million more in the current year.

Post GST, there has been a sector-wide increase in the direct distribution channel. Though direct reach was catching up in the sector, the reluctance of the wholesale channel post GST due to their historical lower tax compliance has aggravated the trend.

We feel positive about Britannia’s first quarter performance. Relative smooth GST transition and resultant volume growth have helped in the company snatching market share from national and regional players.

Increased emphasis on cost efficiency along with the continuing premiumisation help in maintaining margins in the backdrop of intensified competition. Further, expansion in international markets and production ramp-up in domestic business is supportive of volume growth.

The stock is currently trading at a multiple of 39x of 2019e earnings which is not cheap and close to the sector average. However, company’s positioning on value (premiumisation) and volume (capacity expansion) is positive which makes it a fit candidate for accumulation.

Astral Poly: Restocking to drive volume after GST blip, expansion plans on track

Astral Poly Technik’s Q1 2018 results were impacted by the channel destocking and lack of clarity amongst the distribution channel participants regarding the GST transition. The company is, however, upbeat about the progress on restocking in Q2 of FY18 and confident of posting double digit volume growth in this fiscal year. We, therefore, remain positive on the stock.

Read more: This midcap’s focus on volume push & new products could make it a piping hot stock

Astral Poly 1

India business impacted by sharp destocking

Astral’s consolidated sales in Q1 FY18 declined by 3 percent mainly on the back of destocking in the India business. Sales volume in the piping business grew by just 1 percent and net realization per ton declined by 6 percent. EBITDA margin improved to 13.8 percent (+66 bps) benefitting from better product mix. The company highlighted lower bottomline number, partially, on account of higher promotional activity (IPL related etc.) done in the last quarter which led to the rise in other expenses (+39 percent YoY).

International business (28 percent of Q1 FY18 sales), which is mainly into adhesives had also suffered due to business transition. Resinova business had a shorter number of days for operations in Q1 FY18 on account of SAP implementation, though it still managed 9 percent YoY growth in sales.

SEAL IT business (UK) had 11 percent sales growth on a constant currency basis. However, sharp GBP depreciation on a YoY basis led to sales de-growth in rupees terms.

astral poly 2

Volume guidance for FY18 maintained

Management cited that month of July witnessed 19 percent volume growth in the pipes business on the back of sharp restocking. For FY18, company guided to 16 percent plus volume growth which, if achieved, would be commendable after a lackluster sales in the first quarter. Nevertheless, historically, first quarter has been the weakest quarter in terms of sales, contributing about 18 percent of annual sales.

Margin guidance reiterated

On the margin front, the company is confident of maintaining 14-15 percent EBITDA margin for the current year. Astral’s margins are expected to find support from the continued backward integration of PVC/CPVC compounding in every plant. In the Hosur plant, full benefit of CPVC compounding would be visible in Q3 FY18.

Capacity expansion plan on track

Astral Poly 3

On the status of capacity expansion plans, management mentioned that the new plant in Rajasthan would be complete by December 17 and capacity expansion in Hosur plant would be over by end of March 2018. Thus, aggregate capacity for the piping business would be about 175,000 MT by the end of the current fiscal year.

Positive on company’s execution capability

While Q1 results were expected to be weighed down by GST related channel destocking, early indications on restocking are assuring. The company’s capacity expansion plans for the domestic business seems to be on track and we expect Astral to post volume-driven growth in the medium term in the pipes business.

On the adhesives business, Indian business is in a nascent stage and company can benefit from the discounted pricing strategy compared to market leader (Pidilite). We haven’t yet factored the upside from selling high margin adhesive products from the international subsidiary in the domestic market.

Astral Poly 4

Our financial projections remain largely unchanged.  Currently, the stock trades at a multiple of 34x 2019e earnings, which in the context of near-term volume growth and foray into high margin adhesive products, looks reasonable and worth a candidate for accumulation, in our view.

Global earnings are in fine fettle and event risk could be the only cloud

Recent international macro and micro newsflow has been positive, providing a conducive backdrop for global equities, including India, especially for companies with global linkages.

For Indian equity investors it is clearly a relief as corporate earnings increasingly show pressure points emanating from the GST rollout.

Robust US corporate results – impressive topline growth

US’ Q2 2017 corporate earnings season is drawing to a close, as more than 84 percent of S&P 500 companies have already reported their numbers. About 70 percent of S&P 500 companies (long term average: 54 percent) reported a sales beat with IT and materials sectors faring better. In general, cyclicals have led the growth with financials and energy contributing to highest aggregate sales surprise. On the back of this, aggregate sales estimates for the S&P 500 companies have improved for both CY 2017 and CY 2018.

Charts: S&P 500 revenue growth estimates change from June end



Improved sales from sectors having higher international exposure

In general, sectors with improved sales numbers are companies with higher international sales exposure implying improving demand trends elsewhere in the world. In fact, in the previous market cycles, outperformance of commodities in general and metals and mining sector in particular have gone hand-in-hand with the outperformance of emerging markets.

Chart: S&P 500 geographic revenue breakdown


Q2 poised for double digit earnings growth

Compared to expectations, 72 percent of the S&P 500 companies fared well, which is a bit lower than the long-term average of 77 percent but higher than recent quarters. On a year-on-year basis, earnings growth is in lower double digits. If this momentum holds for the entire season, this will be the first time that markets will witness two consecutive quarters of double digit earnings growth since Q4 2011. Energy sector has been the biggest contributor of growth along with Semiconductor (IT) and Insurance (Financials).

Overall, the takeaways from the US earnings season are positive. Excluding energy sector, where expectations were elevated, S&P 500 companies (in aggregate) have witnessed an improvement in both earnings and sales estimates for CY 2017 and CY 2018.

US domestic money flows to international markets

In the post earning conference calls, there are now increasingly fewer references to Trump’s administration/policies. To some extent, the enthusiasm of corporates and financial markets is in check. Interestingly, mutual funds’ outflow from US equity markets continues with almost a balance inflow from the passive money flow (ETFs), which is about USD 99 billion year-to-date.

However, US domestic fund flows for both ETFs and mutual funds tracking international markets are on the rise. Year-to-date, according to EPFR database, about USD 130 billion has been invested in international markets indicating that local investors are finding value in non-US markets.

Europe: Another quarter of improving earnings

In case of eurozone, earnings results for the 83 percent of the STOXX 600 companies, which have reported, have been broadly positive with about 60 percent beat observed at both topline and bottomline numbers. Higher sales surprise was seen for the oil & gas, financial services and insurance sectors. That said, earnings revisions at the index level are broadly flat as improving fundamentals are offset by the adverse impact of the appreciating euro.

Leading indicators point to growth

Leading indicators like PMI readings for the United States, Eurozone, Russia and China were well above the threshold of 50 and underlined the robust expectations on factory orders. For Japan, it moderated, and weakness was seen in some Asian countries – India (largely GST-related), Korea, and Indonesia. Overall global manufacturing PMI (JPMorgan) remained solidly in an expansion phase at 52.7.

Hard economic data is largely supportive…

USA’s July non-farm payroll was solid at 209k payroll gains, higher than expectations. Lower unemployment rate (4.3 percent) and improving wage growth provided another reassuring data point for the Federal Reserve.

Across the Atlantic, eurozone GDP growth of 2.1 percent in Q2 2017, was seen as the fastest growth rate since 2011, indicating recovery in the continent, far stronger than in neighbour Britain.

Closer to home, in China, recent trade data was weaker than expected with exports at 7.2 percent (vs 10.9 percent expected) and imports at 11.0 percent (vs 16.6 percent expected). Though there was some pick-up towards the end of Q2 2017, Chinese trade data nevertheless needs to be closely monitored as it remains a crucial gauge for world trade.

Having said that, China’s continuing efforts to reduce capacity in metals and mining space and a recent improvement in FX reserve data are positive.

…but a lean period for fundamental data exposes markets to event risk

Overall, both global macro and micro environment provide a conducive backdrop for Indian companies having global linkages. However, in the absence of any major central bank meeting or major fixtures on the global earnings calendar, market sentiment can be more vulnerable to a possible escalation in the North Korea-US stand-off, China’s border antics, Middle-East crises etc. Investors, of course, should stay cautious when the going looks so smooth.

Colgate results show where Patanjali has sunk its teeth

Like with the other FMCG companies, the destocking theme reverberated through the quarterly results at Colgate. The company posted sales shrinkage and a volume dip but nevertheless outperformed the muted expectations of the market.


While this should lift the immediate uncertainty shrouding Colgate, we nevertheless remain concerned about the declining market share of the company in the toothpaste category. Growing competition from Patanjali and Dabur and the commentary from the other FMCG players keep us cautious on the stock.


Quarterly result: Margin expansion on lower input cost and ad spend

Q1 2018 net sales (Rs 978 crore) shrank by 3.5% on account of a destocking-led decline in volume (-5%). EBITDA margins improved by 182 bps YoY benefiting from lower raw material prices and advertising spend. Other income was up 24% which aided in the 8.5% jump in profit after tax.

No respite from market share contraction

The company’s market share has shrunk further in the toothpaste category to 54.3% (vs 55.1% in FY17). Going by some other market research sources, slippage in market share is much higher.

In H1 CY2017, market share for Colgate stood at 52.4%. Dabur has gained from 10.8% (CY2014) to 12.2%. Nevertheless, the big disruptor has been Patanjali. It has gained market share from 0.6% (CY2014) to about 6% now. Patanjali, in fact, has gained market share by 300 basis points in last one year. This figure doesn’t factor in sales from Patanjali’s own stores.

So, certainly, Dabur and Patanjali (Dant Kanti) have wrested market share from the likes of Colgate and HUL. While Colgate is attempting to recoup market share by focusing on herbal category (Cibaca Vedshakti, Activ salt), the market share drop is yet to get arrested. In the tooth paste category also, the company lost its market share from 47.4% in FY17 to 45% now.

Colgate Palmolive’s global CEO, Ian Cook, in a recent global investor call, has acknowledged the competition and changing consumer preferences in India.


Colgate has been a beneficiary of GST rates (18% vs 25% earlier), on account of which the company has reduced prices, both in toothpaste as well as in toothbrush categories. However, valuation remains expensive at 49 times 12-month trailing earnings. The falling market share for this single product category company keeps us concerned and we prefer to wait on the sidelines, looking for any definitive signs of improvement.

Marico sees sharp volume contraction in Q1: GST or Patanjali effect?

Marico posted a weak set of numbers amid destocking that led to sharp volume decline. While the company is keen on holding its turf in the various categories and refraining from any price action, competitive intensity remains formidable. While the outlook remains challenging, valuation looks elevated and we remain cautious about the stock.

Weak consolidated results

Marico posted sales de-growth of 4% in Q1 2018, impacted by sharp volume decline of 7% owing to  channel destocking in its India business. EBITDA margins for the quarter contracted by 215 bps, impacted by trade offers, jump in raw material costs (52.5% of sales vs 48% in FY 2017), partially offset by lower advertising cost (9.5% of sales vs 11.1% of sales in FY 2017).

India operations impacted by sharp destocking


Marico’s India FMCG business (77% of FY 2017 sales), witnessed a volume contraction of 9% YoY leading to sales de-growth of 4%. Volume decline was visible in all the major categories. Operating margin contraction of about 360 bps was mainly contributed by sharp increase in copra prices (69% YoY, 7% QoQ) and liquid paraffin (21% YoY), partially offset by lower prices of rice bran oil (-5%) and packaging materials (HDPE prices, -4%). Copra prices are likely to remain elevated in the near future due to weak crop. Hence, margin pressure is expected to continue. However, in the medium term, the company is confident of maintaining 20%+ operating margin.

Chart: Q1 2018 value/volume mix


International operations: Pricing action helps Bangladesh operations

Sales from International operations (23% of sales, -1% YoY) were impacted by currency headwinds and subdued volume growth (1%). Key highlight was the Bangladesh operations (44% of international sales) which posted a good result aided by pricing improvement in the coconut portfolio by 10%. In this market, the company expects inflation led value growth to be the key driver of the coconut portfolio. Volume growth appears limited as the category has matured here with 86% market share. In Bangladesh, management’s focus is on expanding non-coconut portfolio from current 19% to 30-40% in three years.

Elsewhere, particularly in the MENA region, Marico faced difficult macroeconomic environment with persistent down trading.

Significant GST impact

As per management, GST transition impact was the key reason behind the steep channel correction which was particularly visible in the wholesale channel and rural areas. CSD (Canteen state department) channel (7% of sales) witnessed a 15% decline in sales on account of a virtual pause in business in the month of June. Having said that, the company expects a normalization in channel inventory in this quarter and is projecting volume growth revival to the tune of 8-10%.

Market share gain in coconut oil (25% of sales) but Patanjali remains biggest disruptor

Company reported a slight market share gain in coconut hair oil to 58% (+37 bps) after the contraction visible for the past four quarters. Looking back at the company’s commentary in Q4 2017, we feel that not resorting to price hikes even in the face of steep increase in raw material prices could have helped in holding on to the market share.


If we look at one the major competitor, Patanjali, it has improved market share by 40 bps (1% vs. 0.6%) in the coconut hair oil segment, as per market research sources. Interestingly, market research firms don’t take into account the sales from Patanjali’s own stores. Therefore the reported market share numbers could actually differ a lot from the reality.

Anecdotal evidences, focused group consumer survey, and the Patanjali’s last year sales number from hair care segment (Kesh Kanti) suggest that market share of Patanjali in hair oil segment should be much higher. Last year, Patanjali clocked sales of Rs 825 crore in the hair care segment which is at least 4% of the hair care market (market size: Rs 19,670 crore, source Bajaj corp). This provides some basis for estimating Patanjali’s market share in coconut hair oil, especially in the context of the relatively better customer perception of Patanjali coconut hair oil in the hair care category.

Since Marico is expected to continue with its strategy of defending market share in hair oil and so not increase prices in near future, this segment would be interesting to watch out for.

Difficult quarter and elevated valuation

Marico was amongst the most impacted by GST transition so far. Volume contraction was visible in all categories. Marginal market share gain in the Parachute coconut category needs to be watched carefully, in near term. Company’s improved market share in Amala hair oil seems to be amongst the few positives to look at.

In the near term, elevated raw material cost and competition would prevent any margin expansion. Some moderation in margin cannot be ruled out. Given the elevated multiple (52x 12m trailing earnings), we remain cautious on the stock.