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Friday, July 22, 2016

Yatra Deal Stalls Consolidation in Online Travel

With this, the three major Indian online travel agencies have become well capitalised

The online travel space has moved away from consolidation with the announcement of a reverse merger deal between Yatra and Nasdaq-listed American company Terrapin 3 Acquisition Corporation (TRTL) last week.

With this, the three major Indian online travel agencies have become well capitalised and there is no need for any near-term consolidation in the sector.

“The well-capitalised players will remain in the market. It is a good development for the travel space. The top players will continue to compete and there will be more options for consumers, leading to growth in market,” said Aloke Bajpai, chief executive officer and co-founder of metasearch travel firm Ixigo.

Yatra, valued at $218 million, will list on Nasdaq. The money raised in the process will enable Yatra to continue its growth efforts and compete with other players.

In February, Ibibo secured an investment of $250 million from Naspers, the South African internet and media company, now one of its main shareholders, along with Chinese internet firm Tencent. MakeMyTrip raised $180 million from Chinese travel major Ctrip in January. This means all three leading players are positioned to grow and compete. However, Cleartrip has not announced any large funding in the recent past.

Ankur Bhatia, executive director of Bird Group, which has interests in hospitality and aviation, said while there were no consolidation triggers, the foreign online travel agencies like Expedia could be looking for a target to expand in the Indian market.

Last year, Nasdaq-listed online travel firm Expedia acquired Travelocity, another international player in the space, for $280 million.

In their bid to acquire more customers and market share, companies like MakeMyTrip and Ibibo have been offering steep discounts on hotel bookings, flight tickets, and travel packages.

In the process, all have been burning cash. Yatra incurred a net loss of Rs 88.9 crore on revenue of Rs 354 crore in FY15. The FY16 numbers were not available.

  • Estimated 8.4 million Indians likely to book hotels online by 2016, up from 3.5 million in 2014
  • Indian online hotel sector to be $1.8 billion by 2016, from the current $0.8 billion
  • Hotel bookings are one of the least penetrated segments within the travel categories in India; online bookings account for 16% of the hotel booking currently (expected to grow to 25% by2016)
  • In Europe, 70% of hotel rooms are booked via online booking portals, while it stands at 35-50% in USA.
Source: ICRA report

“They are yet to make money. But, this is true for all online players. Players have not been able to make profit as they try to acquire customers through discounts. It is not a sustainable model. Whatever cash has been burnt, it cannot be recovered from future profitability,” said Bhatia.

The cash raised by these travel companies will primarily go into expansion of online hotel booking and technology to enhance user experience. While bulk of air travel booking (almost 60 per cent) has shifted online in India, the share of online hotel booking is still about 15 per cent. The hotel booking space typically offers a much higher margin of 10-12 per cent against airline ticketing margin of 5-6 per cent.

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Thursday, July 21, 2016

ITC Net Rises 10% Amid Slow Demand

The company's net standalone income during the quarter under review improved by 8.28% as Rs 13,156 cr

Despite weak demand in the fast-moving consumer goods (FMCG) sector and the ongoing stress in the cigarette industry, cigarette-to-hotels major ITC posted an increase of 10.1 per cent in its standalone net profit at Rs 2,385 crore for the quarter ended June.

This profit was four per cent below Bloomberg consensus estimate of Rs 2,485 crore. Net profit during the same period in 2015-16 was Rs 2,166 crore. 

The company’s net standalone income during the quarter, improved by 8.3 per cent: Rs 13,157 crore, against Rs 12,150 crore in the corresponding quarter in the last financial year.

Profit from operations (before other income and finance cost) came in at Rs 3,526 crore versus Rs 3,252 crore in the year-ago period, an increase of 8.4 per cent.

Among business segments, the revenue share from the cigarette business declined by one per cent in the quarter to touch Rs 8,231 crore, up 6.4 per cent year-on-year, against Rs 7,733 crore in the corresponding quarter of the past financial year.

Though the environment in the cigarettes sector, too, has been challenging, analysts expected a growth in volumes.

ITC net rises 10% amid slow demand
According to Abneesh Roy, research analyst, Edelweiss, ITC has reported positive volume growth for the first time in 12 quarters. Also, despite seizures, closed factories and delayed pricing the margins in the cigarette business, the growth was positive. However, maintaining cigarette volumes down the line could be challenging for the firm.

“Overall the results are in line with expectations but going forward, it is worthwhile to see how the company maintains its cigarette volume. Although higher prices will help the company maintain or increase the earnings before interest, taxes, depreciation and amortisation (Ebitda), somewhere down the line, there will be a challenge if volume falls,” Rahul Shah, an analyst with Motilal Oswal, said.

The company has been voicing concern on the newly introduced graphic health warnings (GHW) which covers 85 per cent of a tobacco product’s packet with pictorial warnings against tobacco consumption for a while now.

“The proposed GHW is excessively large, extremely gruesome and unreasonable. There is no evidence to suggest that cigarette smoking would cause the diseases depicted in the pictures or that large GHW will lead to reduction in consumption,” the company said.

In the past four years, the incidence of excise duty and value added tax on cigarettes, at a per unit level, has gone up cumulatively by 118 per cent and 142 per cent, respectively, which in turn, exerted severe pressure on the sector, it said.

Its fast-moving consumer goods segment grew by 9.5 per cent amidst weak demand and deflationary price, particularly in the personal care business, while its loss before interest and tax declined to Rs 4.5 crore against Rs 8 crore in the year ago period. The share of income from the agri business to its total revenue, too, rose by two per cent at Rs 2,794 crore, against Rs 2,325 crore in the first quarter of the last financial year.

The agri business, which contributed to 21 per cent of the firm’s earnings during the quarter, continued to provide strategic sourcing support to its cigarette business, besides being able to leverage its rural linkages to source wheat, chip stock potato, spices and fruit pulp at competitive prices for the branded packaged food businesses.

Revenue from the hotel business declined marginally to Rs 287.4 from Rs 287.8 crore, earned during the first quarter of the 2015-16, because of weak demand and pricing scenario.

Excessive room inventory in key domestic markets and sluggish macroeconomic environment both in India and key source markets impacted revenue in the segment.

The paperboards, paper and packaging segment, which earned Rs 1,323 crore, also faced subdued demand conditions as it declined marginally as compared to the corresponding quarter.

Zero-duty imports under Free Trade Agreement with Asean countries and cheap imports from China along with capacity expansion/ramp-up by other industry players, continued to adversely impact the paper and paperboard sector.

ITC shares closed flat at Rs 250.65 on the Bombay Stock Exchange, on a day the S&P BSE Sensex was down 0.7 per cent. ITC's results came post market hours on Thursday.

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Wednesday, July 20, 2016

FMCG Firms, Eateries Might Regain Pricing Power

HUL, Britannia, Nestle & McDonald's have gingerly started hiking prices

Processed food companies and restaurant chains are likely to regain pricing power this year as urban demand revives on the Seventh Pay Commission payout and rural demand picks up with a better monsoon outlook.

Hindustan Unilever (HUL), Britannia, Nestle and McDonald's have already started hiking prices gingerly and analysts expect the process to gather steam in the second half of the financial year. These companies have had to postpone price hikes for almost all of 2015 because of weak demand.

Prices of pulses, tomato, sugar and palm oil have, however, increased by over a fifth since January. Prices of soya oil and milk, too, have increased by 13 per cent and five per cent, respectively.

All these are used in processed foods and detergents and rising prices will have to be passed on to consumers eventually, according to analysts tracking the industry.

FMCG firms, eateries might regain pricing power
"Most established players have long-term supply contracts, which is why they are not facing inflation to the extent visible at the retail level. Farm yields this year are likely to be better, which will bring down prices," a fast-moving consumer goods industry executive said.

Packaged food firms and restaurant chains have tried to delay price rises over the past four quarters. If food prices do not come down in the next two months, consumers may have to pay more. "We expect a gradual return of pricing growth in 2016-17 on a recovery in demand," an Edelweiss Securities report noted.

"We continuously scan commodity markets and take optimal decisions on buying. Price increases are resorted to when necessary to ensure that quality and value to consumer is maintained," a Nestle India spokesperson told Business Standard.

  • Increase in prices of various food products might impact raw material costs for major FMCG firms
  • Rise in sugar prices to hurt profitability of beverage makers of sugar-based drinks like Colas and juices
  • Higher palm oil price to impact margins for soap makers and branded hair oil segment
  • Surging tomato and vegetable prices is a cause of concern for ketchup, instant noodles makers
  • Quick service restaurant firms same store sales under pressure; could not pass on rise in costs as consumers reduce discretionary spending
  • Lower cheese prices has offset the commodity price rise for QSR chains, might impact margins if prices surge post-monsoon

Britannia and Nestle have increased prices of some milk-based products in the past few quarters. Hindustan Unilever has also effected a three-four per cent hike in prices of non-detergents.

"Market growth slowed down during April-June. Consumer business growth was at four per cent, with a four per cent underlying volume growth, and the operating margin expanded by 70 basis points," an HUL spokesperson said.

A 25 per cent rise in sugar prices since January is affecting the margins of beverage firms, according to an industry executive. Rising prices of sugar in 2015 and a five percentage point rise in the excise duty on fizzy drinks had forced Coca-Cola to hike prices by up to 20 per cent.

Eatery chains, too, are struggling to maintain same-store sales since last year. McDonald's has raised the price of its burgers by 10 per cent.

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Tuesday, July 19, 2016

Under Fire From Investors, Infy CEO Rejigs Top Team

Sikka also wrote to employees expressing his disappointment with the company for not meeting targets

Under fire from investors on the less-than-expected first quarter results and a cut in the yearly forecast, Infosys Chief Executive Officer Vishal Sikka has done a rejig of his top team. The aim is to focus on larger deals and acquire niche companies, in line with his ‘Vision 2020’.

Sikka has expanded the role of former SAP executive Ritika Suri, heading the $500-million innovation fund, to lead the team for large deals. Veteran Deepak Padaki, chief risk officer and head of strategy, would lead the team for mergers and acquisitions. Sudhir Jha has been roped in from Google to help in product management and marketing for Mana — the artificial intelligence platform. 

ALSO READ: Infosys' cloud, infrastructure biz head Samson David quits
Suri’s elevation saw veteran Anup Uppadhayay exit the firm. A day before the results on Thursday, Samson David, who headed Mana, quit the firm. He joined a team of senior executives who have exited Infosys since Sikka took charge.

The changes were made by Sikka through an e-mail on Monday. “I am disappointed our revenue performance was not what we could have delivered, but even more so, this overshadowed the many strong strides we made on executing our strategy.”

The Times of India reported the development on Tuesday.

ALSO READ: Fund managers in a tizzy as Infosys crashes
The firm’s scrip dropped eight per cent after it reported its first dip in four quarters. It also lowered the revenue projection for the year ahead, citing reasons such as customers reducing discretionary spending on software projects.

“We cannot take our eyes off any important aspect of our business, areas of our large and diverse portfolio of services, products, and platforms. In the coming quarters, we must accelerate our work in all key strategic aspects of our work, and must address the weaknesses of Q1,” he wrote.
Sikka, the first non-founder CEO of Infosys has set a revenue target of $ 20 billion, 30 per cent margins and $ 80,000 revenue per employee by 2020.

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Monday, July 18, 2016

HUL Net Cheers But Volumes Disappoint

Reports 10% growth in net profit at Rs 1,174 cr

Aided by a one-time write-back of employee provision benefits, the country's largest consumer goods company Hindustan Unilever (HUL) reported 10 per cent growth in net profit at Rs 1,173.9 crore for the quarter ended June 2016 versus Rs 1,069.2 crore a year ago. Although, eight analysts in a Bloomberg poll said HUL had beaten their estimates on net profit by 8.5 per cent, it is largely due to exceptional or one-time income of nearly Rs 71 crore. Adjusted profit would have fallen short of expectations.

However, if the company had reason to cheer on net profit, that wasn't the case on the volume growth and revenue growth fronts. For the second straight quarter, HUL reported only a four per cent volume growth, lower than the six-seven per cent band it had seen in previous periods.

ALSO READ: We'll look at all levers on pricing: Sanjiv Mehta

Analysts at Emkay Global, in their first cut analysis (prior to the analysts call held by HUL), said, "Net revenues at Rs 8,128 crore was marginally below our expectation, underlying volume growth of four per cent year-on-year was below our estimate of five per cent."

Revenue growth was marginally up 3.6 per cent for the June quarter, touching Rs 8,128.2 crore, down nearly 6.2 per cent according to Bloomberg consensus estimates.

Sanjiv Mehta, managing director and chief executive of HUL, said the fast moving consumer goods (FMCG) market growth in the quarter under review, as well as going forward, would remain muted, presenting challenges for most players. "Volume growth for the overall (FMCG) market has been zero to negative. We are ahead of the market at four per cent. While the monsoon and implementation of the Seventh Pay Commission recommendations are positives for the market, in the near-term, growth will be muted," he said.

During the quarter, earnings before interest, taxes, depreciation and amortisation (Ebitda) was up 8.2 per cent to Rs 1,636 crore from Rs 1,512 crore a year ago, while Ebitda margin (or operating profit margin) grew to 20.1 percent from 19.3 percent year-on-year (y-o-y). Positively, Ebitda was a tad ahead of Bloomberg estimate of Rs 1,625 crore.

HUL net cheers but volumes disappoint
HUL benefited from lower input costs during the June quarter, resulting in a 100-basis point reduction in cost of goods sold (cost of raw materials consumed, purchases of stock-in-trade and changes in inventories of finished goods, work-in-progress, stocks). Segment-wise, personal care revenue was marginally up 2.1 percent to Rs 3,898.6 crore against Rs 3,817.1 crore y-o-y. Personal care earnings before interest and tax (Ebit) margin was up 0.3 percent to Rs 1,021.4 crore from Rs 1,018.4 crore a year ago. HUL's homecare division revenue climbed 6.8 per cent to Rs 2,559.6 crore versus Rs 2,397.2 crore a year ago. Homecare Ebit margin rose 22.4 per cent to Rs 355 crore against Rs 290.1 crore a year ago. But, HUL's foods business Ebit margins fell 20.6 per cent to Rs 17 crore versus Rs 21.4 crore a year ago.

Foods revenue, however, were up 4.7 per cent to Rs 267 crore versus Rs 255 crore a year ago.

Refreshment revenue was up 5.5 per cent at Rs 1,191 crore against Rs 1,130 crore and Ebit margin increased 7.5 per cent to Rs 192 crore against Rs 178.6 crore in the corresponding period last year. The results are as per Ind AS, the new accounting norms applicable from April 1, 2016.

HUL shares closed 2.04 per cent down at Rs 920.45 on the BSE on Monday. It hit a low of Rs 910.40 and a high of Rs 947 in Monday's trade on the exchange.

  • Change in management: Punit Misra, currently executive director and V-P, sales and consumer dept, has quit. Srinandan Sundaram, currently V-P, skin care, will take over from Misra
  • Manufacturing unit in Assam: Has decided to set up a new unit in Assam with an investment of Rs 1,000 cr
  • Approved divestment in Kimberly-Clark Lever: Board has approved to divest its 50 per cent stake in Kimberly-Clark Lever to its joint venture partner.
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