Emkay Confluence – Ideas for Tomorrow; In pursuit of recovery

According to a report by Emkay Global Financial Services:Emkay Confluence (Ideas for tomorrow),the activity levels seem to be back to pre-Covid-19 levels in Agro-Chem, Pharma, FMCG staples, Paints, Steel, Gas and Lubricants segments.Emkay Global Financial services recently held a six days virtual conference which was attended by top managements of over 100 companies representing over US$650bn in market cap – cutting across all market-cap buckets and spread across diverse sectors.

While all companies agreed the worst is behind on economic activity, the views on the pace of recovery differed over a mix of timeframes.Most banks believe that meaningful credit growth recovery is likely only after 18 months, while near term uncertainty on asset quality remains. Insurance companies are affected by the overall drop in demand for their savings proxies and weak credit growth (for Credit Protect products).

The Auto sector is more optimistic of an earlier recovery (as early as the current quarter), based on healthy rural demand, new product launches and some help from exports. IT services companies are looking at strong deal pipelines but the conversion timeline is uncertain. Cement and Building material companies have seen some recovery over the last couple of months already, with healthypricing trends expected to continue. OMCs/gas/petchem business levels appear to be reaching normalcy quite quickly. Pharma and Agro-chem companies shrugged off any hints of Covid-19 disruption, with the latter expecting growth north of 15% yoy in FY21.

Agri-input/Agro Chemicals

Expect Agro-Chemical industry to grow 10-15% in FY21: The companies that participated in Emkay conference expect the Agrochemical industry to grow between 10% and 15% in FY21 on the back of strong H1FY21. Labor shortage during key sowing period has fuelled additional demand for herbicides in labor deficit states like Andhra Pradesh, Telangana and Punjab. Companies expect the rabi season revenue growth in single-digits due to the high base of FY20. Domestic raw material prices have started easing gradually from Q2FY21 onward as the domestic suppliers ramp up production on improving availability of labor.

Top picks from Emkay Global Financial Services: UPL and PI Industries


Automobile Demand outlook improving; Q2 volumes expected to be higher:The discussions with various automobile companies during the conference highlight expectations of volume improvement ahead, supported by a low base, pent-up demand, strong rural sentiment and ramp-up in production levels. Key beneficiaries of strong rural demand include Mahindra & Mahindra, Escorts, Hero MotoCorp and Maruti Suzuki. Q1 domestic wholesales have been weak due to lockdowns and production constraints, but Q2 domestic wholesales growth is expected to be notably better for Tractors, PVs and 2Ws. Similarly, overseas volumes are witnessing a sequential improvement in PVs, 2Ws and CVs. Focus areas for most companies in the near term include ramping up production levels, cost-reduction efforts, ensuring healthy liquidity position, new products, expanding reach, among others.

Top picks: Emkay Global Financial Services remains positive on the auto space, driven by expectations of a sales cycle recovery. India remains a growth market over the medium term on low penetration and increasing aspiration levels. The top picks among OEMs include Eicher Motors, Mahindra & Mahindra and Ashok Leyland. The ancillaries such as Bharat Forge and Motherson Sumi that are outpacing the underlying industry growth due to market share gains and increasing content per vehicle.

Information Technology

The common thread across the discussions suggests that: 1) companies expect a sequential recovery in growth from the Sep’20 quarter (though macro needs to be watched out given the possibility of a second wave of Covid-19); 2) deal pipeline/funnels are very strong although decision making is elongated in some cases; 3) companies do not see any significant risks from vendor consolidation/pricing pressure over an extended period, with the temporary price concessions likely to be over by Q2; and 4) confidence in sustaining margins over the medium term as companies expect increased offshoring and pyramidization to help (despite the fact that some of the costs like travel and facilities are expected to normalize over the next few quarters).

Emkay had upgraded Infosys after June’20 quarter results and our order of preference within Tier I techs remains HCLT> Infosys>TechM (all rated Buy)> Wipro (Hold)> TCS (Sell). Among the Tier II techs, PSYS and BSOFT remain Buy-rated and as our top picks in the sector.


BFSI – Banks

Most banks believe that credit growth will see a meaningful revival only from H2FY22, while margins could face dual pressure from lower LDR/interest reversals once NPA formation accelerates. Moratorium rates have inched up in select retail segments a bit post June, while bankers await clarity on corporate restructuring.

Top Picks: Emkay Global Financial Services remains cautious on the sector in view of subdued growth/margin outlook and uncertainty around asset quality; preference of banks with strong shock-absorption capacity like ICICI, HDFCB and SBI.


The common aspect reported by most companies is that NBFCs amid the current turmoil are maintaining 5-6 months of liquidity buffers which will result in cash drags and a resultant NIM compression. They remain upbeat on the agri economy and expect a revival of the tractor/2W/used vehicle demand; however, CV and bus portfolios remain under pressure due to freight rates coming off, regional lockdowns and schools remaining closed. Emkay Global Financial Services has re-adjusted their focus to cost rationalization amid asset-quality uncertainty.

BFSI – Insurance

The companies have boosted their digitization efforts during the pandemic. Most policies are now available at 2-3 clicks on their apps/websites. With customers now more open to come in for medicals, insurers expect a pickup in sales of large-ticket-size items in the product portfolio. Credit Protect and ULIPs remain under pressure as banks and NBFCs have slowed down mortgage disbursements, and the volatility in equities.

Cement & Building Materials

Cement demand started improving from May’20 after the easing in lockdowns. However, demand in Maharashtra/South region was impacted due to the migration of labor. Cement prices were strong in Q1 and there has not been much correction in the trade segment till now. There could be some cost pressures as freight costs have increased and pet coke prices are on increasing trend. In the Tiles, Plywood and other building materials, production started improving from Jul’20 and there has been a continuous improvement in demand from May’20.

Consumer Durables

Demand scenario continues to improve MoM, and August has started with a positive note. Channel inventory is lower and demand is for fast-moving SKUs. The companies are hopeful of healthy demand during the festive season, which would push inventory filling in the system. Contract manufacturers remain poised on the long-term growth trends with potential government policies to promote ‘Aatmanirbhar Bharat’.



Consumer Goods & Retail

Commentary across most FMCG companies has been positive on demand trends with MoM improvement being witnessed. Staples and paints have seen a faster recovery, with June-July volumes growing yoy, whereas alcobev, QSR and fashion retail have seen a slower pick-up and are still below pre-Covid-19 levels. Growth and profitability outlook appears positive for Q2 due to the recovery in demand and strong cost-saving initiatives undertaken by most companies. Overall input cost outlook remains benign, and the cut in ad spends and other discretionary spends highlighted by companies is likely to drive better profitability.

Engineering & Capital Goods

Engineering & Capital Goods Companies in the Engineering & Capital Goods space expressed cautious optimism regarding improving order inflow visibility. Working capital remains an ongoing focus area, while execution is slowly normalizing. The labor situation is already approaching close to 80-85% of pre-Covid19 levels and not much of a challenge now.

Metals & Mining

Demand for steel has been recovering MoM. However, the demand has not recovered to the pre-Covid-19 levels. Demand for coal has also been increasing MoM. However, collections still lag due to delayed payment by Gencos. The graphite electrode industry continues to be under pressure as high-cost needle coke is still being consumed while graphite electrode prices have reduced considerably from the peak. Emkay expects high-cost needle coke inventory to get consumed over the next 3-6 months and cost structures to rationalize. Steel prices moved up in the range of Rs3,000/t in the last two months, driven by 1) strong international steel prices, 2) pent-up domestic demand and 3) pick-up in economic activity.

Oil & Gas

The Oil & Gas sector witnessed recovery in volumes from Covid-19-induced lows of April. While oil demand is still 10-20% lower than normal, gas has seen a sharp recovery to almost pre-Covid levels. Lubricant demand has also seen a similar trend. Recovery has happened in prices and margins as well, though it is yet to fully normalize. Overall, FY21 would be a weak year but quarters ahead should see the pace of recovery improving. HPCL has indicated about resilient marketing performance though GRMs are still weak, while Gulf Oil Lube has stated that its volumes have entered a low-single digit growth territory from July. GAIL has highlighted gas and petchem volumes at almost near normal, while GSPL pointed toward outperforming the industry. Pipeline players await tariff regulations though the outlook is still not fully clear. Overall, Emkay received a near positive signal for the sector from the takeaways.


The Pharma sector’s earnings resilience was well-reflected in Q1 earnings, with most companies strongly exceeding expectations. Sharp cuts in opex, gross margin expansion, resiliency of India sales and strong structural API tailwinds were some of the key vectors to this outperformance. Although we believe that the sector outperformance will continue over the next few quarters, given the sharp upmove, Emkay remains selective buyers in Cipla, Aurobindo, Ipca, Divi’s and Granules.



The lockdown across the country led to a significant ~15.5% yoy decline in power demand and 16.5% yoy fall in generation in Q1FY21 due to low power offtake from commercial and industrial consumers (C&I) who account for ~45% of the total power demand. The demand, however, is expected to witness a gradual pick-up in the coming months with further relaxation in the lockdown. Emkay expects overall power demand to decline 8.0% in FY21E. Further, the plan to provide Rs900bn concessional loan to state discoms by the PFC/REC under the Atmanirbhar scheme is a welcome move to bring in the much-needed liquidity in the cash starved sector. To date, Rs235bn loan has been disbursed of the Rs680bn sanctioned by PFC/REC. Emkay continues to prefer regulated entities such as NTPC, NHPC, GIPCL and PGCIL due to their attractive valuations.

Speciality Chemicals

In the backdrop of Covid-19, manufacturers that supply specialty chemicals to industries such as pharmaceuticals, agrochemicals and healthcare are seeing sustainable demand from end users at least in the medium term. This was clearly visible in the earnings beat by the companies operating in this area. Further, a gradual recovery in sectors such as automotive, paint and construction may progressively benefit the top-line.

The Indian government’s ‘Aatmanirbhar’ scheme, along with other incentives and trade policies specifically targeted at the chemical industry, should make the sector altogether reasonably attractive for large investments in the long term and further place India as a strong contender globally. Chemicals continue to remain a vital input in numerous industries and value chains across the globe, and certain segments, as highlighted above, have benefited from the uptick in demand.

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