chennai flood: taking stock strategy - spark...

STRATEGY Chennai Flood: Taking Stock

Market data

BSE Sensex 25638

NSE Nifty 7782

Date December 7, 2015

Performance (%)

1m 3m 12m

BSE200 -1% 2% -6%

Sensex -2% 2% -10%

Around 70% of Tamil Nadu’s districts have received 20% plus more rainfall than normal since 1-Oct’15 during the

on going NE Monsoon season. However, the heaviest rainfall in over 100 years in the first week of Dec’15 proves

to be the straw that broke the camel’s back. Chennai, which is the worst affected region, is home to many global

auto manufacturing giants like Hyundai, Ford, BMW, Mitsubishi, Nissan-Renault, Daimler and Caterpillar as well

as domestic players like Ashok Leyland, Royal Enfield, Mahindra & Mahindra, TAFE Tractors and TVS,

production of which have been impacted for most of them. Assuming a loss of 8 working days for the state, we

estimate ~Rs. 214bn loss due to excess rainfall, which accounts for 2.2% of the state’s GDP. Supply-chain

disruption and crop damage could also increase India’s CPI inflation by 15-20bps, given the state holds 5.1%

weight in India’s CPI. Most companies in Tamil Nadu have seen weak sales during the festive season this year

due to massive rainfall, which would result in poor earnings performance of South India focused companies in

December quarter.

Importance of Tamil Nadu in India: With a GDP size of $150bn, Tamil Nadu is around half the size of Singapore’s

economy. It is the third largest state in India and contributes over 8% to India’s GDP. In terms of population, Tamil Nadu

with 72mn population is equivalent of Thailand. It ranks first in terms of urbanization amongst large Indian States, with

48% of the population living in urban areas. Tamil Nadu is the third most industrialized states in the country and it

contributes ~11% to India’s manufacturing sector, the third highest in the country.

Key sectors/companies which have been affected adversely: The state has a diversified manufacturing sector and

features among the leaders in several industries like auto & auto components, engineering, textile, IT and electronic

hardware.

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GAUTAM SINGH [email protected] +91 22 4228 8152

GAURAV NAGORI, CFA [email protected] +91 44 4344 0072

Sector Companies

Affected Facilities Impacted Remarks

Auto

Apollo Tyres

Company has one plant at Oragadam - Chennai,

which constitutes ~33% of the total production

capacity.

Per company press release dated Dec 05, 2015, due to the heavy rains and flooding, production

operations at the Oragadam plant had been impacted and production loss has been to the tune of

10 shifts -1500 MT approx. Per the same release, operations have since commenced and the

production loss/consequential loss of profit is "Not significant"

Ashok Leyland Company has one plant at Ennore - Chennai, which

contributes ~40% of the total production capacity

Though the company has not issued an official statement, media reports indicate that production

might have been impacted.

Eicher Motors

Manufacturing facilities of the Royal Enfield division

are entirely located in the vicinity of Chennai at

Thiruvottiyur and Oragadam.

According to the press release dated Dec 03, 2015, production at its RE division facilities was shut

since Dec 01, 2015. Information on the functioning of the mfg. facilities, loss of production (if any)

during subsequent rain-affected days and number of days for which production was impacted has

not been shared. The company is currently operating at a production run-rate of 1500

motorcycles/day. The production loss in Nov 2015 due to rains was stated as 4000 motorcycles.

TVS Motors Manufacturing facility in South India is located in

Hosur.

The company has not issued any official statement on the production loss, if any, incurred in

December. However, the company had reported loss of sales of ~15,000 units for November on

account of inclement weather.

STRATEGY Key sectors/companies which have been affected adversely

Sector Companies


Banks & NBFCs

Repco Has about 28% of the loan book concentrated in

Chennai region.

Collections will be impacted in the short term. Loan growth in the region should also see moderation.

In general, third quarter is seasonally a tough quarter with regards to collections and this event may

accentuate this problem marginally.

Cholamandalam

Investment &

Finance

Has only about 9% of the portfolio in the state of

Tamil Nadu and even lower share in Chennai region. Do not see much impact.

Shriram City Union

Finance

Has ~40% of the business in TN and sizeable portion

in AP. See some moderation in collections. Loan growth also likely to see a blip.

City Union Bank Has about 70% business from TN. Given the wide spread diversification of portfolio within the state, we see a limited impact.

Karur Vysya Bank Has about 45% of the business from TN. Growth may slow down marginally but we see limited impact on asset quality.

Cement

Ramco Cements,

India Cements,

Dalmia Bharat

Companies exposed to Tamilnadu will see volumes

impacted for the month of Nov and Dec. Ramco

cements and India cements have around 40-45% of

their volumes contribution from TN whereas Dalmia

Bharat has around 15-20% volume exposure.

Building material companies generally have 30% - 40% exposure to TN will see volume contraction

in month of Nov and Dec

Consumption

Asian Paints The company has 2 facilites in Tamilnadu

viz.Sriperambadur & Cuddalore which are impacted We observe that both the locations were severly impacted by floods.

Indian Terrain Chennai facility and warehouse The company disclosed that both the company's office as well as factories remained shut due to

inundation of water.

Titan Coimbatore & Housur facilitiies We observe that these areas were least affected by the latest floods.

ITC Chennai & Coimbatore facilities We believe the Chennai facility would have been affected.

Hindustan Unilever Chennai, Coimbatore & Hosur facilities We believe the Chennai facility would have been affected.

United Breweries Aranvoyal & Udambakkam facilities We believe both the facilities would have been severely affected on account of the proximity to the

lake.

Godrej Consumer

Products Limited Maraimalai Nagar (Chennai) & Karikkal facilities We believe the Maraimalai Nagar facility would have been impacted on account of the floods.

STRATEGY Key sectors/companies which have been affected adversely

Sector Companies


Consumer

durables

TTK Prestige, V-

Guard

Direct impact on floods should be visible in V-Guard

and TTK Prestige where TN contributes atleast ~15%

of revenues.

White goods (TVs/Refrigerators/Washers), festive demand commentary has been weak in TN while

we expect this flood could have impacted sales further.

IT Services All IT Companies

Chennai is a huge delivery center for all major IT

companies, with ~25-30% of the total sector

workforce based out of here. Cognizant, TCS,

Polaris, Hexaware,Infosys led the list.

We don’t expect any major impact of Tier-I IT companies given their size and scale of operations. As

employees have been temporarily relocated to other offices in Bangalore and Hyderabad, we don’t

expect any major loss of man hours on account of floods for Q3FY15. As far as Tier-II IT companies

are concerned, we also don’t expect any major loss as companies are more likely expected to work

over the next three Saturday’s of the month to recover any man hours lost due to floods in Chennai

city. For Instance, to recover the billable hours lost due the excessive rainfalls in last fortnight of

November 2015, Hexaware worked on one of the Saturdays last month and is expected to do the

same in December 2015 as well. Other Tier-II IT companies are expected to follow the same path.

Pharma Natco Pharma The company has one API manufacturing facility at

Manali Industrial Area, Chennai

The Unit manufactures a few oncology APIs. The company believes that this temporary shutdown

should not impact its pipeline launches associated with this plant. The unit is also adequately insured

for any losses it has incurred in fixed assets, raw materials and loss in production including work-in-

progress.

Road Sector KNR Construction

From our coverage, KNR should witness subdued

execution in this quarter with ~45% of orderbook from

TN

Oil & Gas CPCL Refineries has been shutdown for the last 5 days Water has completely receded now. CPCL is working to restart the plant which could take some time

(at least a week). CPCL operates a 10.5 mmt refinery in TN

Others Redington

Whilst it’s too early to comment on the extent of loss

Redington might have faced due to floods, given its

strong presence in Chennai and other parts of Tamil

Nadu some minor inventory loss and revenue loss

cannot be ruled out.

STRATEGY Around 70% of Tamil Nadu receives 20% plus excess rainfall over the

normal rainfall during the on going NE Monsoon season

Tamil Nadu witnesses two consecutive years of deficient rainfall in

FY12 and FY13…

Source: IMD, Spark Capital Research

…this year , it has received 58% excess rainfall during the NE

monsoon season so far

Source: IMD, Spark Capital Research

79

15 21

31

12

42

23

-16

-33

-2

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

NE Monsoon: % deviation from normal (Tamil Nadu and Puducherry)

Tamilnadu and

Puducherry

subdivision has

received 58%

excess rainfall

during the on

going NE

monsoon season.

Most districts have received excess rainfall in Tamil Nadu % DEP. CATEGORY

KANCHEEPURAM 215 EXCESS

TIRUVALLUR 188 EXCESS

VELLORE 148 EXCESS

CHENNAI 129 EXCESS

TIRUNELVELI 109 EXCESS

VILLUPURAM 105 EXCESS

PUDUCHERRY 91 EXCESS

CUDDALORE 78 EXCESS

TOTAL SUBDIVISION 58 EXCESS

KANYAKUMARI 48 EXCESS

SALEM 39 EXCESS

ERODE 36 EXCESS

TIRUCHIRAPALLI 19 NORMAL

COIMBATORE 7 NORMAL

MADURAI -3 NORMAL

STRATEGY Why Tamil Nadu matters

Tamil Nadu is the third largest state in India, which

contributes 8.4% to India’s GDP

Source: CSO, Spark Capital Research

Tamil Nadu is one of the most Industrialized state in India

Tamil Nadu contributes ~9% to industry and services

sectors of India


Tamil Nadu’s economy outperforms Indian economy

during the economic up cycle and vice a versa


Tamil Nadu is one of the most Industrialized state in

India


13.9

26.1

59.9

7.3

29.0

63.7

0

10

20

30

40

50

60

70

Agri Industry Services

Sector-wise share in GDP (%)

India Tamil Nadu

6.7 5.4

9.6 8.9

5.4

4.7

-1.6

15.2

13.1

7.2

-2

0

2

4

6

8

10

12

14

16

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

Real GDP growth,(%, yoy)

India Tamil Nadu

Tamil Nadu: A high

beta economy

Long term growth trends

indicate that Tamil Nadu

is a high beta economy.

During the high growth

phase, its economy

grows faster than the

Indian economy and

during the down cycle its

GDP growth falls below

the growth rate of India.

This is because Tamil

Nadu’s economy is

driven by services and

Industry sectors, which

tend to do well during

the up cycle and vice a

versa.

0

2

4

6

8

10

12

14

16

Share in India's GDP (%)

8.4

4.4

9.3

8.9

2 4 6 8 10

Overall GDP

Agri

Industry

Services

Share of Tamil Nadu in India's respective sectors (%)

STRATEGY Why Tamil Nadu matters

Tamil Nadu has been growing at a faster pace than the rest of India in the last four years

Industrial growth

Source: CSO

Real GDP growth

Source: CSO

Services sector growth

Source: CSO

Agri sector growth

Source: CSO

Tamil Nadu has grown at

the fastest pace in South

India in the last four years

led by higher services and

industrial growth.

Agriculture sector growth

has been lower than India

due to weak NE monsoon

in the last three years.

7.8 7.1

6.6 6.2 6.1

Tamil Nadu Kerala Andhra Pradesh

Karnataka Telangana

Avg. GDP growth in last 4 years, %

India: 6.2%

3.4 3.1

2.6

1.9

-0.7 Tamil Nadu Telangana Andhra

Pradesh Karnataka Kerala

Avg. agri growth in last 4 years, %

India: 4.9%

10.3

6.2 5.3

4.8 3.8

Kerala Tamil Nadu Andhra Pradesh

Telangana Karnataka

Avg. industrial growth in last 4 years, %

India: 4.2%

9.2 9.1 8.6

7.7 7.3

Tamil Nadu Andhra Pradesh

Karnataka Telangana Kerala

Avg. services growth in last 4 years, %

India: 7.5%

STRATEGY Appendix 1

Tamil Nadu: Key Industries that drive the economy

IT and ITeS

Chennai, the ‘Detroit of India’, is fast emerging as a major export hub of cars for the Southeast Asian and South African

markets.

Chennai has the capacity to produce 12.8 lakh cars and 3.5 lakh commercial vehicles annually.

Tamil Nadu has 30% share each in the Indian automotive and auto components industries, 17% in the trucks segment,

and 20% each in the passenger cars and two-wheelers segments.

The Government of Tamil Nadu has signed memorandums of understanding (MoUs) with five auto companies –

Daimler India Commercial Vehicles, India Yamaha Motor, Ashok Leyland-Nissan, Eicher Motors and RPG Group

company Philips Carbon Black – for an investment of up to US$ 1.7 bn in the state.

The Government has recently unveiled an automobile policy which would focus on future development and

consolidation of the automobile and components industry, where the state enjoys a comparative advantage.

Chennai Hosur

Automotive

Tamil Nadu has emerged as a key destination for IT investments. The state has 22 approved IT Parks.

The TIDEL Park in Chennai is spread over 1.28 mn sq ft. It is the largest IT facility in India, promoted by TIDCO and

ELCOT.

Electronics Corporation of Tamil Nadu Limited (ELCOT) has established eight Information Technology Special

Economic Zones (ELCOSEZs) in Chennai and seven in Tier-II locations: Coimbatore, Madurai (2), Trichy, Salem,

Tirunelveli and Hosur.

A TIDEL Park (IT-SEZ) in Coimbatore was inaugurated in August 2010

The land for setting up the first International Institute of Information Technology (IIIT) in Tamil Nadu has been identified

in Sethurapatty, near Tiruchirapalli.

Coimbatore

Tiruchirapalli

Ranipet Hosur

Madurai

Salem

Tirunelveli

Chennai

STRATEGY Appendix 1

Tamil Nadu: Key Industries that drive the economy

Wind Energy

Tamil Nadu is known as the “Yarn Bowl” of the country. It is the largest producer of cotton yarn, accounting for 41% of

India’s production

Coimbatore and Tirupur are the major textile centres in Tamil Nadu.

Tirupur is known as the “Knitting City” and the Tirupur cluster contributes nearly 56% of India’s total knitwear production

and about 90% of cotton knitwear exports.

Coimbatore is called the “Manchester of South India”. Karur, Madurai and Rajapalayam are the other textile centres in

the state.

Tamil Nadu produced about 1,482.79 mn kg of spun yarn, accounting for about 34% of the annual spun yarn production

of the country. Tamil Nadu has 1,997 spinning mills (60.6% of mills in India), 458,000 power looms and 207,000

handlooms.

Karur

Madurai Rajapalayam

Tirupur

Coimbatore

Tamil Nadu has the highest installed wind energy capacity in India. The state has very high-quality, off-shore wind

energy potential off the Tirunelveli coast and Southern Thoothukodi and Rameshwaram coast.

As of March 2014, Tamil Nadu had installed wind capacity of about 7,300 MW. Wind energy generation has increased

from 2,040 MW in 2004-05 to 7,300 MW at present at a CAGR of 15.2%.

Tamil Nadu added an all time high capacity addition of 1,083 MW in 2011-12. Another 220 MW was added between

2012-14.

Consumption of wind energy stood at 9,000 mn units in 2013-14 compared to over 11,000 mn units in 2012-13. The

state plans to add 5,000 MW capacity in the next five years.

Tirunelveli

Rameswaram Thoothukudy

Textile

STRATEGY

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Absolute

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horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year

horizon SELL Stock expected to fall >10% over a 1-year horizon

STRATEGY

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