As many of you would be aware, the Federation of Karnataka Chambers of Commerce & Industry known as FKCCI is the apex body in the State of Karnataka for Industry, Trade and Services. This was founded by none other than Bharat Ratna Sir M V who was a genius engineer and a great visionary. FKCCI has just completed its 100 years of successful journey and I was elected to take over as the 100th President of this iconic organization with effect from 1st July this year. It is now my responsibility to steer this organization to adapt itself to convert the challenges into opportunities. The Federation should continue to act as a spokesperson for Trade, Industry & Commerce and be a trusted partner of the Government and provide timely inputs to policy making by the State as well as at the Centre.

In this direction, I will assure you that me and my team have started well in earnest and in the very first month, we were able to organize a major event on Income Declaration Scheme 2016 which was attended by the Finance Minister of India, Shri.ArunJaitely. We collaborated with the Income Tax Department in organizing the event.

This month we are partnering with the Media Today Group in organizing the AgriTech Exhibition and Congress at BIEC from 26th to 28th August 2016.

Next week, I am visiting United States to participate in the AKKA World Conference. I am delighted to inform you that I have been invited as a Special Dignitary by the President of The Association of Kannada Kootas of America (AKKA) who will be organizing the 9th World Kannada Conference in Atlantic City, USA from 2nd to 4thSeptember 2016. The President of the Association has requested me to lead a Delegation from Karnataka to participate in the Conference.Apart from participating in the Business Forum and speak on various Business and Investment opportunities in Karnataka, the following issues would also be discussed:

1. FKCCI which is the apex Trade and Industry Body in the State of Karnataka would honour an NRI personality from Karnataka who has contributed significantly for the economic development of his mother State.

2. FKCCI would be the main facilitator of investments into Karnataka by the NRIs from Karnataka. FKCCI would particularly provide a platform for promoting Cross-Border entrepreneurship. The Start-Ups from Karnataka to be incubated in the US would be an objective.

3. AKKA in collaboration with TiE would explore the possibility of setting up an Invest Karnataka Fund and FKCCI would facilitate in identifying suitable opportunities for investments.

As I mentioned, Sir M Visvesvaraya, our founder was born on 15th September. To express our gratitude, we celebrate his Birthday as the Founder’s Day and we confer a Sir M V Memorial Award on a great personality who has contributed to the economic development of Karnataka and who has also excelled in philanthropy. Our Awardees include Shri.N.R.Narayana Murthy, Ms.KiranMazumdar Shah, Shri.AzimPremji, Shri.NandanNilakeni and others. This year the award is being conferred upon Dr.M.K.PandurangaSetty who is a well-known industrialist, more importantly an educationist, Rotarian and an intense philanthropist who has believed in giving back to the Society.

Let me share with you yet another great event we are preparing for. Shri.NarendraModiJi, our dynamic Prime Minister who made us remember that we are proud Indians has agreed in principle to inaugurate our Federation’s Sir M V National Economic Conference. The convenient dates are awaited from the PMO and we are hopeful that it will be at the end of October or the beginning of November this year. It will be a large event where we would have decision makers as speakers who would deliberate on topics such as Re-Designing the financial infrastructure of India to meet global challenges, Policy measures to make India a ten trillion dollar economy. We would keep you informed of further details.

As I mentioned, we have just completed our first century of existence. Traversing one hundred years successfully is a great thing for any organization. To commemorate the success, we are building a Centenary Auditorium Complex, just behind this Heritage Building. It would have a large auditorium with a seating capacity of around 300 and 8 different Halls / Conference Rooms that would facilitate capacity building programs, workshops, Seminars, Skill Development Programs and more importantly, house the Sir M V Economic Research Centre that would take up issues of practical importance in the field of Industry, Commerce and Economy.

I would like to mention here that Shri.SiddaramaiahJi, our beloved Chief Minister is appreciative of the significant role played by the Federation in promoting the economic development of the State by various programs including creating Tax Awareness, Tax compliance, Skill Development, Policy inputs etc., and has granted Rupees ten crores for the Centenary Auditorium Project. Apart from, training, Capacity Building and Research, the Auditorium complex provides facilities for business development at the Centre of Bengaluru.

We would also be organizing a Green Summit sometime around February – March next year. Green Summit is now a brand of FKCCI and the event will showcase energy related products, technologies and important issues will be discussed at Seminars during the event.

Many of you would be aware, that the PravasiBharatiya Divas is being organized by the Central Government in Bengaluru from 7th to 9th January 2017 in collaboration with the State Government of Karnataka. This is a major event wherein 5000 to 6000 NRIs are expected to participate. Around that time, FKCCI is planning to organize a Tourism related event that would showcase various products from Karnataka, diverse culinary delicacies, so that the whole of Bengaluru could turn itself to welcome the visitors and create a festive ambience making it a shopper’s paradise. We want to promote Tourism and for every visitor we want to make it an enjoyable experience.

We are also interested in organizing a major event centering around education. Karnataka is the hub of higher educational facilities. We would like to gather all the stake holders not only from within the State but, from outside the State and from abroad so that the opportunities available could be projected in an optimal manner to promote further collaborative efforts in this field.

Similarly, Karnataka has been an important Centre for the manufacture of parts and sub-assemblies for the aerospace industry. However, defence industry is also interested in developing innovation and also to procure products from MSMEs in Karnataka. Boeing and Airbus are also interested to source their products from Karnataka. Accordingly, we would like to organize a Vendor Development Program that would be of mutual benefit.

In the field of ITBT, Karnataka has been a pioneer. The eco-system that has been created has served the sector well so far. We need to get geared up for the Internet of Things (IoT) and for further development in this sector to ensure investments, innovation and job creation. We are going to organize an event to give fillip to our objectives.

We are also coordinating efforts for Skill Development programs which will be taken across to all Districts in Karnataka. Health facilities to reach out to the nooks and corners of the States would be possible through telemedicine. Bricks and mortar facilities need a lot of funding and a large number of trained personnel. We are collaborating with a large telemedicine company to create the necessary infrastructure so that the delivery of healthcare could be built on this platform.

The Federation, over the decades has been organizing several of our flagship events that include MANTHAN, a talent nourishing event where college students are encouraged to come up with viable business models. We have Export Excellence Awards event, Innovation Awards Event and many such. All these would continue but, with greater vigor.

My ambition is to make FKCCI an internationally known credible organization. We would like to make the Federation known for its intellectual inputs including research on practical economic issues affecting the State. More importantly, it should be an effective spokesman and a bridge between the Government and Trade, Services & Industry. We would like the Federation to have a significant digital presence, active through the social media and leverage technology to identify and deliver programs and facilities for the benefit of the members.

Friends, this is only the beginning. I would be keen to meet and interact with you at regular intervals. I would be available for you at any time you want. If you have any queries, seek any comments or want to suggest anything to me, you are most welcome.

The Edelweiss consumer pack’s (excluding Nestle and United Spirits) revenue growth, as per IND-AS, tapered to 6.4% YoY (7.8% YoY in Q4FY16 as per I-GAAP). Price cuts by Dabur, Marico, Pidilite and impact of seasonality on Godrej Consumer’s household insecticides (HI) dented growth. Gross margins tapered QoQ, but YoY expansion sustained for 17 of 21 companies (expanded for 16 of 21 in Q4FY16). EBITDA grew 11% YoY (15% in Q4FY16) despite HUL, Dabur and GCPL pruning ad spends on absolute basis. We anticipate price growth to return in H2FY17 following increase in raw material prices (milk, wheat, copra, palm oil etc., prices are up; food inflation at 11% plus a near-term concern for lower end of urban). Good monsoon, 7th Pay Commission payout and GST are key positives.

Monsoon to ease rural distress ; urban growth perking up
Rural growth tapered further in Q1FY17, however, likely to improve in H2FY17 led by strong monsoon. Urban growth, especially in general trade, remains soft, but modern trade is growing at a faster clip—a green shoot. While paint companies—Asian Paints, Berger Paints—sustained double digit volume growth at ~11% YoY each, Pidilite’s volumes jumped 9% YoY. ITC’s cigarette business clocked 3% YoY volume growth (positive after 12 quarters). In staples, while Marico and Emami posted strong domestic volume growth of 8% and 6.4% YoY, respectively, the same was soft for HUL and Dabur at ~4% YoY each. With demand likely to improve gradually, step up in innovations will be the key differentiator (Nestle stands out with ~25 innovations in past few quarters).

Softer ad spends boost margins; price hikes anticipated
Though gross margin growth tapered QoQ, it expanded YoY. However, rise in prices of palm oil, crude & crude-linked raw materials, sugar, flour etc., and likely bottoming out of copra led to some price hikes. While Britannia hiked prices ~5% YoY in the later part of Q1FY17, Marico raised prices of Parachute 5% in July 2016. PFAD prices have risen , which will trigger reversal of promotion/price cuts in soaps. Ad spends as a percentage of sales for HUL, Dabur, GCPL and Jyothy Labs dipped and hence aided some margin expansion—ad spends of Marico, Emami and Colgate remain robust which was validated by better volumes. Intense competition from Patanjali is prompting players like Dabur to step-up promotions, Anniversarisation of phasing off of excise benefit impact for most players will lead to pricing-led growth in FY17. GST rates will be a key monitorable for most consumer companies especially ITC.

PVR’s Q4FY16 revenue and PAT came in line. Key positives were: (i) advertising increased by 19% YoY versus Inox Leisure which saw 2% YoY dip; (ii) net box office collection surged 36% YoY, driven by 9% YoY LTL ATP growth and 18% YoY LTL footfalls growth aided by blockbusters like Airlift and Neerja; (iii) F&B revenues soared 50% YoY led by 17% LTL SPH growth. EBITDA margins expanded 767bps YoY on favourable base. Going ahead, PVR will have a strong base of H1FY16. However, we expect the company to clock decent performance drawing from strong content pipeline and screen expansion in FY17. Maintain ‘BUY’.

Screen expansion continues; employee cost slightly higher
In Q4FY16, PVR added 25 screens (52 screens in FY16). The company will add another 65 screens in FY17 (17 in Q1FY17, 14 in Q2FY17), which will drive footfalls in FY17. Employee cost increased by 39.7% YoY due to addition of new screens and New Bonus Act. PVR will continue to add 50% of its new screens in tier I cities where ATP is above INR200. Upcoming movies such as Udta Punjab, Independence Day and Sultan are expected to do well for PVR.

Q4FY16 conference call: key takeaways
PVR expects 3-5% YoY ATP growth in FY17. The company has 283, 181 and 60 screens in tier I, II and III cities, respectively. E-commerce accounts for 10% of the ad revenue. PVR’s ad rates are ~30-40% higher than competitors. Going ahead, entertainment tax will be marginally higher as Delhi’s higher entertainment tax was not present in the base for 3-4 months. The company expects SPH to increase 8-10% YoY in FY17. It is launching popcorn, juices and merchandising for kids to drive growth. PVR expects DT Cinema’s consolidation from Q2FY17.

Outlook and valuations: Positive; maintain ‘BUY’
We remain enthused by PVR’s dominance and expansion in exhibition business and we envisage the company to continue to benefit from strong content pipeline in FY17 as well. We estimate PVR to log 19.8% EPS CAGR over FY16-18. At CMP, the stock is trading at 27.7x and 22.1x FY17E and FY18E EPS, respectively. We maintain ‘BUY/Sector Outperformer’ with a target price of INR956 (25x FY18E EPS).

Bajaj Electricals’ (BJE) Q4FY16 revenue at INR13.5bn (up 3.5% YoY) came 4% below estimate due to lower-than-expected revenue in E&P and consumer durables (CD) segments (nil growth YoY). Moreover, higher employee expense provisioning of INR70mn impacted margin. While EBIT margin of lighting segment at 7.2% (up 10bps QoQ) improved, that of E&P and CD segments fell 180bps and 150bps QoQ, respectively, pushing blended EBIT margin down to 5% (down 120bps QoQ). BJE’s INR347mn PAT was lower than our INR422mn estimate. Maintain ‘HOLD’ with target price of INR275 based on SOTP multiples—lighting 5x, CD 18x and E&P 7x on FY18E earnings.

Lower revenue growth, higher costs impact profitability
During Q4FY16, revenues of CD and E&P segments remained flat. However, lighting segment’s revenue jumped 20% YoY. Provisioning for employee wage increase for FY17 has been accounted for during this quarter (INR70mn) squeezed EBITDA margin to 5.5% versus 5.9% in Q4FY15. CD business EBIT margin of 3.4% fell ~350bps YoY owing to higher fixed costs. However, E&P and Lighting EBIT margins of 6.6% and 7.2% were higher than the margins of 4.7% and 4.3% in Q4FY15, respectively. Tax outflow of INR186mn was much higher than INR58mn in Q4FY15 due to regulatory requirements. Overall PAT came in at INR347mn, versus a profit of INR469mn in Q4FY15, on tepid operating performance.

Outlook and valuations: Improving; maintain ‘HOLD’
Execution of better margin orders in the E&P segment bolsters confidence in the project business. We anticipate LED business to continue to drive the lighting business. Competitive intensity in CD segment and its focus on secondary sales are likely to keep CD segment profitability under pressure in near term and this change in BJE’s strategy in the CD segment is likely to reap benefits from H2FY17. Return of growth along with pace in its CD business will determine the company’s overall performance over the near to medium term. The stock currently trades at 13.3x and 10.5x FY17E and FY18E earnings, respectively. Factoring in improvised margins, we revise up FY17E and FY18E earnings 19% and 31%, respectively. We maintain ‘HOLD/Sector Performer’ with a revised target price of INR275 (INR205 earlier) based on SOTP multiples—lighting 5x, CD 18x and E&P 7x on FY18E earnings.

AIA Engineering’s (AIA) 2% decline in revenue and 9% growth in EBITDA in Q4FY16 came 7% and 19% ahead of estimates, respectively. Sales beat was driven by 5.7% YoY volume growth with 13% YoY spurt in mining volumes. However, realisation declined 6% YoY. While management remained upbeat on achieving additional volumes of 120,000MT over FY17-19E, concerns remain on margins with management withdrawing guidance owing to variables like aggressive pricing strategy and emerging market currency volatility. With earnings CAGR of mere 4.6% leading to 270bps dip in RoCE over FY16-18E, we maintain ‘HOLD’. However, we remain structurally positive in the long term with scope to raise our conservative 54% capacity utilisation estimate for FY18.

Tepid volumes owing to challenging scenario
Sales declined 2% YoY with volume growth of 5.7% YoY at 53,502MT for Q4FY16 and down 0.5% YoY in FY16 to 185788mt (mining volumes grew 12.9% YoY to 28,594MT for Q4FY16 and declined 5% YoY to 100684MT for FY16). Management maintained that overall volumes remained flat in FY16 owing to certain strategic and conscious decisions taken by the company viz. restricting sales to Ukraine, reduction in South African market volumes owing to currency uncertainties and volume reduction owing to closure of one particular iron ore mine in Brazil. Realisation declined 6% YoY in Q4FY16 and 2% YoY in FY16.

Margin guidance uncertain; capex forecast maintained
Management has withdrawn EBITDA margin guidance (earlier 22-23%) citing emerging market currency volatility and competitive pricing strategy adopted by AIA. Though gross margin dipped 180bps to 62.3%, EBITDA margin grew 290bps YoY to 28.9% on hedging gains. Management guided for capex of INR1.5bn in FY17 and INR2bn in FY18.

Outlook and valuations: Fairly valued; maintain ‘HOLD’
Management highlighted its continued focus on market share expansion and hence maintained its strong capacity addition guidance. Concerns remain on margins led by aggressive pricing. With earnings CAGR of mere 4.6% leading to 270bps dip in RoCE over FY16-18E, we maintain ‘HOLD’, valuing the stock at 18x FY18E. However, we remain structurally positive in the long term with scope to raise our conservative 54% capacity utilisation estimate for FY18. Stock currently trades at PER of 18.7xFY18E