Capital Goods: India's Capex J-curve - Comforting, yet troubling!

Capital Goods

India's capex J-curve poised to kick-start



India's capex J-Curve will be kick-started by (1) reorientation of fiscal expenditure, and

(2) higher capex by Public Sector Units. This will be followed by revival in the industrial

cycle culminating with greenfield/mega projects.

Historical analysis (1995 onwards) suggests that government capex is largely stable

across cycles, while private capex has been volatile. History seems to be repeating itself

- even now, government projects adds continue to be at normative levels of INR1,600b/

qtr whereas private projects adds are in negative territory for last 2 quarters.

Policy initiatives offer ray of hope; but execution challenges persist across sectors, and

will need to be addressed.

Capital Goods: India's Capex J-curve: Comforting, yet troubling!

Page No.

Summary

..............................................................................................................................

Story in Charts

.................................................................................................................

4-5

India's capex J-curve poised to kick-start

......................................................................

6-8

Policy initiatives: Ray of hope; but more needs to be done...

..................................

9-12

Challenges ahead, execution is critical

......................................................................

13-14

Private v/s PSU capex: Profitability Conundrum

.....................................................

15-18

How to play the theme?

.............................................................................................

19-23

Valuation and view

...........................................................................................................

Companies

....................................................................................................................

25-71

Top Picks

Larsen & Toubro ..................................................................................... 26-32

Cummins India ........................................................................................ 33-37

Thermax .................................................................................................. 38-44

Others

ABB ......................................................................................................... 45-50

BGR Energy ............................................................................................. 51-55

BHEL ....................................................................................................... 56-60

Crompton Greaves .................................................................................. 61-65

Siemens .................................................................................................. 66-71

April 2013

Capital Goods

India's Capex J-curve: Comforting, yet troubling!

Benefit from structural trends in dawn of investment cycle



India's capex J-curve is comforting because net project adds by government sector remain

at normative levels of INR1,600b/qtr.

At the same time, it is troubling because private capex remains elusive, with net project

adds in negative territory v/s peak levels of INR5,000b/qtr in 2008.

Initial project awards may well be a winner's curse, as PSU capex tends to drag RoE/RoIC for

capital goods companies. Hence, prefer mid-value product companies over project

companies.

Three pockets of opportunities: (1) Business models with rising exports, (2) Power products,

and (3) Beneficiaries of power shortages and rising energy prices. Our top picks are L&T,

Cummins and Thermax.

India's capex J-curve poised to kickstart …

Over the last 18 months, India's investment cycle has collapsed. In our opinion, India's

capex J-Curve will be kick-started by (1) reorientation of fiscal expenditure which

could accelerate spending on flagship government projects, and (2) government's

attempt to address the contentious issues in several sectors, leading to increased

capex by Central and State Public Sector Units. This phase will then be followed with

revival in the industrial cycle culminating with traction in greenfield and mega projects.

… public sector comforting, private sector troubling

As things stand, India's capex J-curve scenario is both comforting and troubling! It is

comforting because (1) net project adds by government sector remain at normative

levels of INR1,600b/qtr, and (2) successive reform measures could have a positive

effect in accelerating public spending in segments like energy (hydrocarbons, power),

infrastructure (roads, railways, urban infra), etc. It is troubling because (1) private

capex remains elusive, with net project adds in negative territory v/s peak levels of

INR5,000b/qtr in 2008, and (2) Increased share of public projects in the aggregate mix

imply a major compromise on RoE / RoIC for capital goods companies.

Prefer mid-value product companies over project companies

The initial round of project awards may well be a winner's curse. This is because PSU

capex is characterized by tender based bidding, elongated working capital cycles and

continued execution delays. In this environment, we believe mid-value product

companies are better positioned than project companies: (1) minimum threshold

demand exists because of exposure to base industries and also large replacement

demand, and (2) they enjoy a dominant position, and thus better control on margins.

Sector strategy: L&T, Cummins, Thermax top picks

We identify three pockets of opportunities for investors, based on structural issues:

(1) Business models that benefit from increased exports, insulated from domestic

slowdown (TMX,

KKC, LT

have ~25-30% of profits from overseas markets)

(2) Power Products, particularly in EHV and UHV segments, where revenue growth /

margins should start stabilizing (CRG,

ABB, SIEM

are the key beneficiaries) and

(3) Beneficiaries of power shortages (eg

KKC, TMX, SIEM)

or high energy prices (eg

TMX, ABB, SIEM

for energy efficiency products).

LT, KKC and TMX

remain our top picks.

SIEM

is a strong play on the macro environment.

CRG,

the turnaround in overseas business will be an important stock price driver.

MOSL top picks

CMP

TP % upside



LT 1,395 1,714



KKC 500

585



TMX 566

770

April 2013

Capital Goods

Story in Charts

India's Capex J-curve: Poised to kick-start, but ...

Mid-cycle

Key Drivers

Private Sector Mid

Sized Greenfield

Projects

Amount

Medium to High

Sectors

Base

Industrials

Segments

Cement, Food

Processing,

Chemicals, Textiles,

etc and several mid-

sized industrial

projects

Products

Industrial Products /

Electronics

Beneficiaries

Several Capital

Goods Players

Late-cycle

Key Drivers

Private and PSU Mega

Greenfield Projects

Amount

Very High

Sectors

Basic Industries,

Utilities

Segments

Metals,

Hydrocarbons,

Utilities etc

Products

Construction incl

Equipments, Power

BTG, T&D, Industrial

Products

Beneficiaries

L&T, BHEL, and

various Capital Goods

players

Kick-start

Ongoing

Key Drivers

Debottlenecking /

Brownfield, Buildings

& Factories

Amount

Low to Medium

Sectors

General

Industry / Townships

Products

Efficiency

Improving products,

Industrial Products /

Electronics

Key Drivers

PSU Capex / Flagship

Govt Projects

Amount

Medium to High

Sectors

Infra, Utilities, O&G

Segments

Railways,

Roads, DFCC, Urban

Infra, Power, Refinery

Products

Construction,

Power BTG, T&D,

InduststialProducts

Beneficiaries

L&T, TMX,

KKC, SIEM

... Initial round of capex to be driven by accelerated public spending

#1 Policy initiatives accelarating pace but #2 INR 4t of public projects pipeline building up #3 But challenges ahead;

more needs to be done

to be awarded by FY14-15

execution is critical

Enablers to improve

the investment climate



Cabinet committee on

investments



Investments by cash

rich PSUs



LARR cleared by cabinet



Policy rate cuts



Reorientation of fiscal

expenditure

#1 #2



Power Sector: Price pooling,

discom restructuring to be

addressed



Road Sector: Environmental

clearance, land acquisition

contentious issues



Plan Expenditure: Fiscal

quality, removal of structural

impediments key



Infrastructure: Transparent,

comprehensive regulatory

mechanism needed

Private sector capex comes down drastically during periods of slowdown while government capex remains stable (share in

outstanding project investments, %)

April 2013

Capital Goods

Story in Charts

Initial round of bidding may well be a winner's curse

Increased share of

public projects will

entail a meaningful

compromise on ROE/

ROIC parameters for

Capital Goods

companies.

Mid-value product

companies are better

placed, as minimum

threshold demand

exists (replacement

demand) unlike large

value products which

are largely contingent

on greenfield capex

Benefit from three structural trends which are also the pockets of opportunities for investors



Power products

Increased Exports Power Products Power Shortage /High Energy Prices

3-4

TMX

KKC

CRG

BHEL

7-9

12-15

ABB



Power shortage/ high enegry prices

SIEM

13.3

25-30

BGR

3-4

~2-5

1: Contribution of overseas business profits to consolidated profits; 2: Exports includes Deemed

Exports; 3: Business models benefitting from power shortages includes CPPs, HRSGs, Gensets,

etc; but excludes Utility (IPP) Power Generation Equipments and Project sales; 4: Businesses

benefitting from power shortages includes Waste Heat Recovery units, Motors / Drives, Building

Technology, R enewables, et c; 5: CRG st andalone revenues



Exports

Compar ative Valuations

Company

M-Cap

CMP

EPS (INR)

P/E (x)

EV/EBITDA (x)

RoE (%)

(USD b) (INR) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E

ABB#

Neutral

2.1

511

6.5

11.0

16.3

79.2

46.3

31.3

30.7

26.3

18.9

5.4

8.8 12.1

BHEL

Neutral

8.6

182

24.0

18.5

13.3

7.6

9.9

13.7

4.8

5.5

6.6

21.5

14.7 14.7

BGR Energy Neutral

0.3

193

23.1

19.4

19.1

8.4

9.9

10.1

5.7

5.5

6.0

14.2

11.1 10.4

Crompton

Buy

1.2

2.8

7.9

12.5

34.0

11.9

7.5

15.8

7.1

4.7 (1.4)

13.0 18.6

Cummins

Buy

2.7

500

25.3

28.4

33.0

19.8

17.6

15.2

15.0

12.4

10.3

31.7

31.0 31.9

L&T

Buy

16.3 1,395

82.8

87.0 100.5

16.8

16.0

13.9

14.4

12.4

11.3

16.6

15.6 15.4

Siemens## Neutral

3.4

530

14.5

21.8

27.0

36.5

24.3

19.6

17.2

12.3

10.3

12.5

17.4 19.6

Thermax

Buy

1.3

566

25.6

27.3

37.8

22.1

20.7

15.0

13.9

10.9

7.5

17.6

16.8 20.7

Havells

Buy

1.5

630

33.0

40.3

48.1

19.1

15.6

13.1

9.9

9.8

7.8

29.5

28.5 27.1

# Year end December; ## Year end Sep tember

April 2013

Rating

Capital Goods

India's capex J-curve poised to kick-start

Initial round of capex to be driven by accelerated public spending



India's capex J-Curve will be kick-started by (1) reorientation of fiscal expenditure, and (2) higher capex by Public Sector

Units. This will be followed by revival in the industrial cycle culminating with greenfield/mega projects.

Historical analysis (1995 onwards) suggests that government capex is largely stable across cycles, while private capex has

been volatile. History seems to be repeating itself - even now, government projects adds continue to be at normative levels

of INR1,600b/qtr whereas private projects adds are in negative territory for last 2 quarters.

Policy initiatives offer ray of hope; but execution challenges persist across sectors, and will need to be addressed.

#1 Policy initiatives accelarating pace but #2 INR 4t of public projects pipeline building up #3 But challenges ahead;

more needs to be done

execution is critical

to be awarded by FY14-15

Enablers to improve

the investment climate



Cabinet committee on

investments



Investments by cash

rich PSUs



LARR cleared by cabinet



Policy rate cuts



Reorientation of fiscal

expenditure

#1 #2



Power Sector: Price pooling,

discom restructuring to be

addressed



Road Sector: Environmental

clearance, land acquisition

contentious issues



Plan Expenditure: Fiscal

quality, removal of structural

impediments key



Infrastructure: Transparent,

comprehensive regulatory

mechanism needed

Outstanding project investments: Govt projects form an increasing proportion in periods of

constrained GDP growth (% composition)



During the period March 1997 to June 2004, when the investment climate had collapsed, share of government

sector in total project outstanding had gradually increased from 46% in March 1997 to a peak of 63% in CY

2003/2004. In a robust capex environment, this share bottomed at 37% in March 2009 and has since then

increased gradually to 42% in December 2012 as headwinds started building up. We expect this contribution

to increase meaningfully going forward.



Also, within government capex, the share of Central government has been consistently increasing from 50%

during 1995-1998 to 60% currently.

Private sector capex comes down drastically during periods of slowdown while government capex remains stable





Source: CMIE

April 2013

Capital Goods

Public project to kick-start India's capex J-curve

Over the last 12 months, India's investment cycle has collapsed. In our opinion, India's

capex J-Curve will be kick-started by (1) reorientation of fiscal expenditure which

could accelerate spending on flagship government projects, and (2) government's

attempt to address the contentious issues in several sectors, leading to increased

capex by Central and State Public Sector Units. This phase will then be followed with

revival in the industrial cycle culminating with traction in greenfield and mega projects.

Government capex has been stable historically across cycles



Project Awards (March'97-

Jun'2004) TTM, INR b

1996

Peak

1,154

1,871

8.1

1997-04

Average

940

6.1

Govt

Private

GDP Gr (%)



Project Awards (Sept 2004-

Dec 2012) TTM, INR b

2004 — 2012 Dec

Average Peak 2012

Govt

5,370 9,063 3,935

Private

9,189 17,462 1,170

GDP Gr (%) 8.2

9.6

6.0

Historical analysis suggests that government spending towards project investments

has been consistent.



Mar-1997 to Jun-2004:

During this period, when the investment climate had

collapsed, net projects added by the government sector averaged at INR940b per

annum v/s average of INR1,154b per annum at the peak levels in 1996. Thus, the

project investments had largely remained steady. In contrast, net projects added

by the private sector stood at just INR37b per annum during the period of March

1997 to June 2004, v/s INR1,871b at the 1996 peak. Thus, the private capex had

demonstrated sharp volatility.



Sep-2004 to Dec-2012:

Current trends suggest that history is repeating itself, with

private net project adds declining to just INR1,170b during 12 months ended

December 2012 v/s average levels of INR9,189b per annum during September

2004 till September 2012. Government net project adds also declined from average

of INR5,370b per annum during September 2004 to September 2012, to INR3,935b

during 12 months ended December 2012. However, latest figures suggest that

government capex is bouncing back to normative levels of INR1,600b/qtr, and this

trend is comforting. In contrast, private capex net adds over the last 2 quarters

have been in negative territory.

Government spending has supported project investments during periods of constrained GDP growth rates (Incremental outstanding

project investments, INR b, ttm)



March'97-Jun-2004



Sept'2004-Dec'2012

Source: CMIE, GOI

Note: Net project adds is calculated as the difference between opening and closing projects outstanding and thus does not capture the value

of projects completed during the period.

April 2013

Capital Goods

Private sector capex volatile, currently negative for 2 quarters

Unlike government capex, private sector capex in India has historically remained

both cyclical and volatile. Even now, in terms of quarterly additions, net projects

added by the private sector have declined to negative INR41b in quarter ended Dec

2012 and the trend is worrying.

Hence, the key challenge is to sustain and improve on the levels of government

capital expenditure in the economy. This is easier said than done as several projects

face viability and funding issues.

Govt projects have bounced back to normative level while net projects added in private sector

remains in negative territory (INR t)

Source: CMIE, GOI

April 2013

Capital Goods

Policy initiatives: Ray of hope ...

... but more needs to be done

Cabinet Committee on Investments has been set up to fast-track

projects more than INR10b.



Land Acquisition and Rehabilitation and Resettlement Bill,

which has been cleared by the Cabinet, could bring greater

clarity, reduce uncertainty, and thereby aid investments.



Investments by cash-rich public-sector units have the

potential of crowding-in the private sector.

Enablers to improve the investment climate



Progress on the Delhi-Mumbai Industrial Corridor



On the policy front, government has taken several

has the potential of providing a fillip to the

measures to kickstart the investment cycle - from

investment climate.

financial restructuring of SEBs to fuel price hikes



Policy rate cuts by the RBI and improving business

to setting up a Cabinet Committee on Investment

sentiments could also support a revival in

for fast-tracking mega projects (major measures

investments.

tabled below).



Fiscal correction, through rationalization of subsidies



There are strong signals of investment activity

has reduced the fiscal imbalance and freed up

across sectors (key projects highlighted below).

resources to step up capital expenditures



However, there are challenges, and effective



execution holds the key to India moving

up the capex J-curve.

Key policy initiatives aimed at accelerating the investment spend

Initiative

POWER

Financial Restructuring of SEBs

Tariff hikes by SEBs

Review of PPAs

New SBD

Fuel Supply Agreement

Coal Price Pooling

PPP in coal production

Railways in coal producing states

Coal Mine Allocations



HYDROCARBONS

Review of Exploration Policy

Shale Gas Policy

Natural Gas Pricing

Expedite Clearances

Subsidy Rationalization



OTHERS

Fertilizers

Railways

Roads

DFCC

DMIC

April 2013

Description/Remarks

Deadline extended till March 31, 2013; 5 of 7 highest loss-making states have subscribed

19 SEBs raised tariffs in FY13, and 18 SEBs now have FAC pass through

CERC hearing completed, expect resolution shortly

DBFOT model being proposed, expected to be notified shortly

46 FSAs signed of the planned 92 by end FY13 and 143 by FY15

CCEA has given in-principle approval

Strongly advocated in Budget 2013

SPVs formed in 3 states, construction of 2 lines in Chhattisgarh commenced

8.5b tons to be allocated to state owned power companies, bids invited in Feb 2013

Exploration policy to be reviewed to move from profit sharing to revenue sharing

Policy to encourage exploration and production of shale gas will be announced

Natural gas pricing policy to be reviewed and uncertainties regarding pricing to be removed

CCI meeting; 39 blocks taken up, pending Defence clearance for several blocks resolved

Fuel price hike, cap on LPG cylinders, Direct Cash Transfer

Urea Investment Policy approved

Passenger Fare hike, improvement in Operating ratio from 88.8% in FY13 to 87.8% in FY14

Constitute a regulatory authority; to award 3300kms in 1HFY14; Supreme court delinks

Environment clearance from forest clearance.

1500kms to be awarded in FY14

Plans for 7 new cities finalised and work on smart industrial cities will start during FY14

Capital Goods

Indicative / possible list: Project award pipeline building up

INR4t of possible PSU projects pipeline building up

We have attempted to

compile an indicative/

possible list of few large

public sector projects

that could possibly be

awarded by FY15

LNG Terminals: Expect at least 3-4 project awards in FY14/15

Several LNG terminals are being proposed to be set up in the country, both on the East

and West coast. There are several driving factors: (1) ready infrastructure for gas

transportation, (2) severe gas shortage leading to capacity underutilization in end

user industries like power and fertilizers, (3) increased diesel / power tariffs across

states leading to improved viability, etc. Apart from LNG terminals of Petronet, Shell

and GSPC, there are possibilities of many more LNG projects in the pipeline from

companies like Reliance-BP, IOC, HPCL, etc.

Key LNG projects in the pipeline

Company

Petronet LNG

Shell

GSPC-Adani

Location

Dahej

Gangavaram

Hazira

Mundra

Capacity (m tons per annum)

From 10 to 13

From 3.5 to 5

5, FSRU

Fertilizer projects: Possible awards of INR350b in FY14/15

The Cabinet Committee on Economic Affairs cleared the Urea Investment Policy (UIP)

in December 2012. In 2010-11, India consumed 28.2mt of urea v/s domestic production

of 21.9mt, and thus there is a deficit of 7-8m tons. Hence, we believe that many of the

fertilizer projects listed below could possibly be awarded over the next 18 months.

Key fertilizer projects in the offing

Company

Kribhco

IFFCO

Chambal

Tata Chem

Zuari

RCF

Indo Gulf

Total

Location

Hazira

Krishnapatnam

Gadepan

Babrala

Belgaum

Thal

Jagdishpur

m tons

INR b

0.5

22.5

1.3

58.5

1.2

54.0

1.2

54.0

1.3

58.5

1.2

54.0

1.0

45.0

7.7

346.5

Please note that the above list is indicative

April 2013

Capital Goods

Power T&D: Urgent need to correct the cumulative under-investment

We believe power T&D should see accelerated spending, given that several SEBs

have raised tariffs over the past 18 months. Financial Restructuring Plan (FRP) will

lead to improved liquidity in the system and thus project awards.



Many states are in the process of tying up with Power Grid Corporation to

strengthen the sub-transmission system and large generation capacities,

particularly as Central/ Western India remains bottled up for lack of transmission

capacities.



Successive grid failures in North/North-east India in early July 2012 could also

possibly lead to some sense of urgency to correct the cumulative under-

investments in the sector.



Metro rail projects: 12th Plan investment estimated at INR1.3t

Urban infrastructure development is now becoming an important priority, given the

haphazard urbanization in various cities. There are 30 cities in India with a population

of over 2m each, and according to the Planning Commission, these cities are likely to

implement metro rail at some stage or the other. There are 14 cities with a population

of over 3m each and 7 cities with a population of over 5m each. Several of these cities

are actively planning Metro Rail. During the 12th Plan (FY13-17), the Working Group of

Urban Transportation estimates investments in metro rail projects at INR1.3t.

Several Metro rail projects could get on track

FY12 (A)

0.0

14.8

19.1

30.9

0.0

2.5

0.0

67.3

Total Plan Outlay (INR b)

FY13 (BE)

FY13 (RE)

FY14 (BE)

0.0

0.1

16.7

12.8

8.3

16.5

18.3

21.2

45.1

38.5

51.8

0.3

0.0

0.6

0.3

0.2

1.3

2.7

0.1

0.3

0.0

1.6

0.0

0.1

81.8

72.5

85.1

21.5%

7.6%

17.4%

Source: Budget 2013

Ahmedabad Metro

Bengaluru Metro

Chennai Metro

Delhi Metro

Jaipur Metro

Kochi Metro

Kolkatta Metro

Mumbai Metro

Pune Metro

Total

% YoY

Power BTG: Improved ordering environment from State sector

In its Jan-2013 concall, BHEL stated that the bidding pipeline is strong with 1,800MW

bids under evaluation; 5,300MW bids in offing and 7,000MW in the pipeline – all bids

will have to be submitted in 1HFY14. Coal mine allocations to the state-owned power

companies and approval of the Standard Bidding Document will be important triggers

to kickstart the generation capex power generation.

April 2013

Capital Goods

8GW of power generation projects likely to be awarded shortly

Project

Suratgarh

Chhabra

Tanda

Banaharpalli

Bhusawal

Neyveli

Khargone

Total

Owner

Raj SEB

NTPC

Orissa Power Generation

Mahagenco

Neyveli

NTPC

Sector

State

Central

State

Central

Cap (MW)

1,320

660

1,000

1,320

8,260

Source: Media/Company

Oil refinery: Capacity expansion/upgradation an opportunity

Major oil marketing companies are planning to expand capacities over the 12th Plan

with targeted expansion of 40m tons. We expect several of these projects to be

awarded in FY14/15. Also, an important opportunity for capital goods companies would

be the upgradation of refineries to meet the EURO IV norms (EURO V for select cities).

At least 36mtpa of refinery capacity could possibly be awarded in FY14/15

Refinery

Kochi Refinery

Chennai Petroleum

IOC Northeast Refinery

HPCL Vizag

IOC Koyali

HPCL Barmer

Expansion type

Brownfield

Greenfield

Capacity (mtpa)

Source: Media/Company

Other mega projects under discussion

DFCC

NHAI

Railways

Roads

1,500km to be awarded in FY14

3,300km to be awarded in 1HFY14

534-km Mumbai-Ahmedabad rail-corridor project as a pilot

Access-controlled Delhi-Ludhiana Expressway of 357 km

22km Mumbai Trans-Harbour link connecting Mumbai and Nhava Sheva port

April 2013

Capital Goods

Challenges ahead, execution is critical

Business sentiments remains challenging



Reforms since Sept 2012 have reduced overall risks, but there is a long road



Power Sector: Price pooling,

discom restructuring to be

addressed

Road Sector: Environmental

clearance, land acquisition

contentious issues

Plan Expenditure: Fiscal quality,

removal of structural

impediments key

Infrastructure: Transparent,

comprehensive regulatory

mechanism needed

ahead to bring about a sustainable turnaround for the Indian economy.



Business sentiments remain weak despite reform initiatives. We present below

the key execution challenges in major sectors.

Power Sector: Price pooling/SEB restructuring to be addressed

The problems in the power sector are yet to be fully resolved despite

concerted efforts by the government. On the coal linkage issue, while

power producers have started signing new FSA with Coal India that

commits supply of 65% of the assured coal quantity through domestic

sources and another 15% in the form of imported coal, the key issue of

price pooling remains unresolved. Also, adequate response from state

governments on the discom restructuring package is not forthcoming.

Road Sector: Environmental clearance, land acquisition

contentious issues

In the road sector, the record tendering by the National Highways

Authority of India awarding 6,491km of road projects in FY12 has not

helped reverse the declining investment in this sector as a very large number of

these projects have not achieved environmental clearances and several roads are

stuck up due to land acquisition issues. It is increasingly becoming difficult to achieve

financial closure for these road projects. Limited interest in new projects, large delays

coupled with poor execution in existing projects has resulted into near collapse of

the sector in FY13. Even the projects being awarded on EPC basis (engineering,

procurement, construction) where the state bears the cost, are making little headway

because the new legal framework necessitates upfront environmental clearances for

even small stretches of land before private contractors execute the project.

Plan Expenditure: Fiscal quality, removal of structural impediments key

The government has made a commitment to bring down the level of the fiscal deficit.

However, if the compression in government expenditure is mainly from plan / capital

heads, it raises concerns relating to quality of the fiscal consolidation. As the reforms

announced by the government take effect, the improvement in investment climate

would help in reviving growth. Increased public investment to crowd in private

investment along with removal of structural impediments to private investment are

needed to pull the economy out of the current slowdown.

I don't see Indian or

foreign companies

making large

investments. CCI has not

acted as first expected.

Outlook is not very

bright.

Deepak Parekh,

Chairman, HDFC

(In Economic Times,

March 2013)

April 2013

Infrastructure: Transparent, comprehensive regulatory mechanism needed

The total investment in the infrastructure sector during the 12th Plan is estimated at

USD1t, nearly double the 11th Plan figure. The share in infrastructure investment

increased from 22% in the 10th Plan to 38% in the 11th Plan and is expected to be

about 48% during the 12th Plan. Still, more than half of the resources would be

required to come from the public sector and government. This would require not

only the creation of the fiscal space but also use of a rational pricing policy. Further,

scaling up private sector participation on a sustainable basis will require a transparent

and comprehensive regulatory mechanism to be in place.

Capital Goods

Macro indicators point towards continuing tough

economic climate

Macro indicators continue to point towards prevailing tough environment for order

inflows in the capital goods sector as recovery in industrial capex looks constrained.

While RBI data on project sanctions continue to be near lowest levels, project

investments as reported by CMIE have declined to pre-2004 levels. The impact is also

visible in gross capital formation, which has remained muted.

Project sanctions by banks remain constrained

Capacity utilization remains at lower levels

Source: RBI

Growth in GCF remains muted; Average growth closer to levels during down-cycle in 2009

Source: GoI

New project additions at 2004 levels (INR b)

Projects outstanding growth moderating (INR t)

Source: RBI, CMIE

April 2013

Capital Goods

Private v/s PSU capex: Profitability Conundrum

Initial round of bidding to be the winner's curse



The initial round of project awards may well be the winner's curse. This is because PSU

capex is characterized by tender-based bidding, elongated working capital cycles and

continued execution delays, dragging down RoE/RoIC.

In this environment, we believe mid-value product companies are better positioned than

project companies: (1) minimum threshold demand exists because of exposure to base

industries and also large replacement demand, and (2) they enjoy a dominant position,

and thus better control on margins.

The margin is going to be

more of a function of

cost play rather than

pricing play in the market

place.

R Shankar Raman,

CFO, L&T

Initial projects may be low on profitability, the winner's curse

The initial round of pick-up in investment climate will likely be driven by public capex,

as private capex remains elusive. For capital goods companies, this raises questions

over the profitability and capital efficiency parameters between private v/s PSU capex.

We believe the difference is stark, with private capex being significantly more

profitable. PSU capex is characterized by tender-based bidding, elongated working

capital cycles and continued execution delays. Hence, increased share of public

projects in the aggregate mix will imply a major compromise on RoE / RoIC metrics. As

has been the case in BTG bids, we believe the initial round of bidding in several PSU

projects may well end up proving to be the winner's curse.

Private Capex vs Public Capex: Stark differences for capital goods players

Bidding

Private Capex

Negotiated awards, in several instances,

with an incentive structure loaded towards

fast track execution. Short-listing of bidders

based on the execution capabilities.

Shortened working capital cycles.

Public Capex

Tender-based bidding, with strict adherence

to the rule book. Short-listing of bidders is

through a pre-qualification process.

Elongated working capital cycles. Also, in

several instances, project advances are

interest bearing.

While the attempt is to minimize time

Attempt is to minimize time overruns, and

Project completion

overruns, there are several factors beyond

thus the impact of IDC. Any dispute

the control which could lead to delays /

resolution regarding change in scope of

change in scope of work. Dispute resolution

work is generally expedited.

could be a tedious process in quite a few

instances.

Note: We have listed down the general characteristics of private v/s public capex. These may vary on a case to case basis.

Working Capital

Competition to be fierce, particularly for large value products

where demand is contingent on fresh capex (mega projects)

Apart from terms of trade of typical PSU capex, competition among players is another

reason for the initial projects be the winner's curse. Most capital goods companies

are faced with a declining trend in order book. This necessitates aggressive bidding

postures, largely due to the need to absorb fixed costs. Thus, as ordering starts after

a long hiatus, we expect competition among participants to be fierce. This will

particularly be the case for large value products, like power BTG, industrial machinery,

heavy engineering, etc, where the demand is contingent on fresh capex (mega

projects). Thus, the initial bids could possibly be on 'sunk-cost' basis.

April 2013

Capital Goods

Constrained BTB Ratio (x)

Revenue growth impacted (% YoY)

Aggregate analysis based on data pertaining to MOSL engineering coverage universe

Source: Company, MOSL

Product-based companies better placed

In contrast, product companies are much better positioned in this environment:

(1) They have a minimum threshold demand because their products are demanded

by several base industries (and not just mega projects); also replacement demand

is an important constituent (and thus not just dependent on capex based demand)

(2) Many product companies have a dominant positioning, and thus have better

control on margins v/s project based companies

(3) India is fast becoming a hub for light engineering exports; currency movements

have improved the margin profiles.

Still, even here, we believe bidding will be more aggressive than usual, and companies

with innovative strategies in terms of process improvements, efficiency gains, supply

side management, etc, should see minimum impact to margins.

Incremental orders: characteristics of Projects v/s Products (for capital goods players)

Large value products

Description

Power BTG, industrial machinery, heavy

engineering, etc where the demand is

contingent on fresh capex (mega projects)

Profitability positioning

Initial project awards could be the winner's

curse, given the declining trend in order

book. This environment necessitates

aggressive bidding postures, largely due to

the need to absorb fixed costs. Thus, as

ordering starts after a long hiatus, we expect

competition among participants to be fierce.

Relatively better off as several of these

companies have dominant positioning and

thus better control on margins. Having said

that, constrained environment will

necessitate aggressive bidding strategies

here too. Companies with innovative

strategies in terms of process

improvements, efficiency gains, supply side

management, etc, should see minimum

impact to margins.

Increased levels of sub-contracting entails

limited fixed cost pressures. Still, sustaining

margins in new bids will be a challenge

given the increased competitive intensity.

Mid Value Products

Low to mid value products like motors,

drives, DG sets, industrial turbines, captive

boilers, switchgears, etc where the demand

is also supported by replacement cycle and /

or exposed to base (mid-sized) industries

Projects

Infrastructure, Industrial, etc and largely

pertains to EPC contracts / civil construction,

etc

April 2013

Capital Goods

Illustration #1

Large Value Products

Power BTG witnesses severe pricing pressures

NTPC / DVC bulk tender 1 (11 units of 660MW) and bulk tender 2 (9 units of 800MW)

was a fairly large sized order worth INR390b, and had witnessed severe competitive

intensity. In the turbine package of bulk tender 2, L1 price at INR10m/MW quoted by

BGR was ~23% lower than the L1 price quoted by Alstom in bulk tender 1. Also, the

Toshiba-JSW consortium which quoted INR17.5m/MW for the turbine package in bulk

tender 1 had quoted at INR10m/MW for bulk tender 2. Similarly, in the boiler package

for bulk tender 1, BGR's price at INR14m/MW was 20% lower than the winning bid in

bulk tender 2.

Several players had believed that the aggressive bidding is largely pertaining to the

entry pricing strategy for several new entrants, and are not sustainable going forward.

The recent bids in Rajasthan (Suratgarh and Chhabra, 2.64GW) and NTPC Tanda (1.32GW,

boilers) indicate that pricing environment is yet to show signs of improvement.

Bid prices for bulk tender 1 projects (INRm/MW)

Jan 2011

Feb 2012

Boiler

Bid prices for bulk tender 2 projects (INRm/MW)

March 2011

Sep 2011

Boiler

Note: These are approximate 'read out' prices based on inputs from the industry

Cost re-engineering and improved capacity utilization are critical to achieve

profitability levels. The attempt, in our opinion, will be to lower the material

requirement in boilers through improved engineering (currently at ~30,000tons for 1

supercritical boiler of 660MW) or indigenize the rotor in turbines (30-35% of cost of

turbines). Also, there would be attempts to use the factory as an outsourcing hub for

the overseas markets, to improve the utilization levels.

April 2013

Capital Goods

Illustration #2

Mid-value products v/s Projects

[2A] ABB India: Stable margins in products despite muted revenue growth

For ABB India, mid value products' (like drives, motors, robotics, building

technology products, etc) revenue has been much more stable than that of its

industrial project business.



Likewise, on the margins front, ABB India's EBIT margins (ttm) for automation

products bounced back to 9.8% in Dec-12 from lows of 6.6% in Dec-10. In contrast,

process automation business continues to report losses with negative EBIT margin

(ttm) at 1.1% in Dec-12.



Products relatively stable as supported by replacement demand; projects on fresh capex

ABB India, Revenues % YoY, ttm: Constrained

ABB India, EBIT Margins, % YoY, ttm: Product business showing

stabilization

Products = Automation Products; Projects = Process Automation

Source: Company, MOSL

[2B] L&T: Product business showing initial signs of stabilization

In L&T's case, revenue growth rate remains constrained for both its E&C (Engineering

& Contracting) and MIP (Machinery & Industrial Products) business segments e.g.

Dec-12 quarter revenue growth was 11.5% / -17.6% YoY. However, MIP business margin

has bounced back to 17.5% from the recent low of 15.2%, while E&C business margin

remains impacted at 11.0% (down 70bp YoY).

MIP margins stabilizing despite a constrained revenue growth

L&T, Revenues, ttm: Constrained for both product and

projects business

RHS

L&T, Margins, ttm: Product business shows bounce back from

the lows

RHS

MIP: Mechanical and industrial product

April 2013

Source: Company, MOSL

Capital Goods

How to play the theme?

Benefit from three structural trends, which are the pockets of opportunity

MOSL top picks

CMP

TP % upside



LT 1,395 1,714



KKC 500

585



TMX 566

770

We identify three pockets of opportunities for investors, based on structural issues:



Business models that benefit from increased exports, insulated from domestic slowdown

(TMX, KKC, LT have ~25-30% of profits from overseas markets)



Power Products, particularly in EHV and UHV segments, where revenue growth / margins

should start stabilizing (CRG, ABB, SIEM are the key beneficiaries) and



Beneficiaries of power shortages (eg KKC, TMX, SIEM) or high energy prices (eg TMX, ABB,

SIEM for energy efficiency products).

LT, KKC and TMX remain our top pick s. SIEM is a strong play on the macro environment, and in

the case of CRG, the turnaround in overseas business will be an important s tock price driver.

Benefit from three structural trends which are also the pockets of opportunities for investors



Power products

Increased Exports Power Products Power Shortage /High Energy Prices

3-4

TMX

KKC

CRG

BHEL

7-9

12-15

ABB



Power shortage/ high enegry prices

SIEM

13.3

25-30

BGR

3-4

~2-5

1: Contribution of overseas business profits to consolidated profits; 2: Exports includes Deemed

Exports; 3: Business models benefitting from power shortages includes CPPs, HRSGs, Gensets,

etc; but excludes Utility (IPP) Power Generation Equipments and Project sales; 4: Businesses

benefitting from power shortages includes Waste Heat Recovery units, Motors / Drives, Building

Technology, R enewables, et c; 5: CRG st andalone revenues



Exports

Trend #1

Business models benefitting from increased exports

Currency movements have increased the competitiveness of Indian manufacturing,

and created opportunities for export-led business models. We believe that several

capital goods companies offering products like DG sets, chillers, waste heat recovery

boilers, heating equipments, industrial machinery, etc will benefit from this trend.

In FY13, INR down 15% vis-à-vis USD…

INR/USD

…and the Chinese Yuan

INR/CNY

April 2013

Capital Goods

Management commentary suggests that exports have become an important thrust area

Management commentary on growth outlook

"Our focus is exports and that's why we are also looking at different countries,

different strategies. And in the coming next two to three years, you will see, a

drastic improvement into the numbers.

Currently exports are 8% to 10% of sales;

and the target is 15% plus."

Thermax

"We have a plan to ensure that

our overall income should go up from international

market to one-third

and the domestic should comprise of two-third. That one-

third will have two components: one component is exported out of India, and

second is, other businesses where it is locally manufactured like Danstoker.

That's the target we have taken and we are working towards that."

L&T

Geographies (apart from the Middle East) contributed 38% of the export orders

in 9MFY13.

Contribution of overseas business to E&C revenues has increased to 23% in

3QFY13, vs 8.8% YoY.

ABB

"Good

implementation of the export strategy over the quarters resulted in double digit

growth

with increased geographical reach."

Elgi Equipment

"What we're trying to do is trying to really put a lot of emphasis into markets

other than India. The company continues to focus on select international market

so that as the economies recover the company would be in a position to

capitalize and grow.

The non-China, Brazil and France sales has grown between 35%

to 40% and this is the exports from India."

Triveni Turbines

"The company's continuing focus and strategy on the export market has paid

rich dividend . During the nine month period,

export turnover is higher by 158% YoY

while the order in-take during the same period has been higher by 54%.

Further, the

visibility for future on the export front is also very good with a strong enquiry

book from varied markets globally. The company is chalking out plans and

allocating more resources to better penetrate export markets both in terms of

segments and geographies."

Kalpataru Power

"In last couple of months, you must have observed we as a company are

focused on the East African and some of these overseas markets.

So I believe that we

should be able to compensate to a large extent from this market."

Jyoti

"As we have been saying, we are

more focused on the overseas business now.

And

we can clearly see that countries like Kenya, Uganda, Nigeria have given a

success in the recent past and we can see in next two to three months, we are

looking into these countries as well as some of the other African countries

including Zambia, Ethiopia, Namibia, Ruanda and of course Bangladesh and

Philippines."

Source: Company, MOSL

Company

Kirloskar Oil

Engines

We believe that India is

fast becoming a hub of

light engineering

exports. Various

companies are re-

drawing their strategies

& this is becoming an

important focus area

Exports as a % of standalone sales, FY12

Export as a % of

standalone sales stands

at 30% for KKC, 22% for

TMX & 12% for LT

Source: Company, MOSL

April 2013

Capital Goods

Exports expected to be an important driver of revenues, and margins (INR m)

2007

2008

2009

2010

2011

SIEM

26,716

30,957

20,537

16,017

26,334

ABB

4,509

7,240

8,637

10,186

16,294

KKC

6,050

7,239

13,129

4,883

10,604

TMX

4,020

6,780

9,120

6,560

10,660

CRG

6,162

7,573

11,591

12,326

10,705

37,706

56,566

73,482

68,662

58,788

BHEL

37,501

24,862

50,253

82,634

92,260

Total

122,665 141,216 186,750 201,269 225,645

% of Revenues

21.5

20.2

21.6

20.7

19.1

Exports includes deemed exports, standalone bussiness,

# estimates

2012

18,817

19,553#

11,908

11,430

8,851

80,574

144,192

295,323

21.3

Source: Company, MOSL

% of

CAGR

Sales (FY07-12)

-7

Cummins has the highest absoluted quantum of FOB exports (INR m)

2007

2,010

3,163

6,050

3,056

5,675

11,158

8,607

39,720

7.0

2008

2,839

4,797

7,239

3,525

7,316

14,467

8,175

48,358

6.9

2009

2,569

4,595

13,129

6,446

10,252

16,513

15,697

69,202

8.0

2010

1,996

4,640

4,883

7,135

9,966

5,101

12,316

46,037

4.7

2011

3,733

8,237

10,604

6,176

8,574

5,553

7,692

50,571

4.3

2012

3,283

9,885#

11,908

7,319

7,652

8,449

10,065

58,561

4.2

Source: Company, MOSL

% of

CAGR

Sales (FY07-12)

-5

SIEM

ABB

KKC

TMX

CRG

BHEL

Total

% of Revenues

# estimates

Trend #2

Power products should see an improved demand environment

We believe power products should see an improved demand environment given that

several SEBs have raised tariffs over the past 18 months. Financial Restructuring Plan

(FRP) will lead to improved liquidity in the system and thus project awards. Many

states are in the process of tying up with PGCIL to strengthen the sub-transmission

system as large generation capacities (particularly in Central/Western India) remain

bottled up for lack of transmission capacities.

Successive grid failures in the North/North-east parts of India in early July 2012 could

also possibly lead to some sense of urgency in terms of correcting the cumulative

under-investments in the sector. Another important demand driver, particularly for

large players, is that the share of ultra-high voltage segment in the 12th Plan is

increasing to 30-32% from 5-7% earlier, and given that there are only 5-6 players

prequalified in this segment, the business economics should possibly improve.

Management commentary has been positive, with Alstom stating that a double digit

growth in execution could be a reasonable assumption in FY14, if the FRP gets

concluded in 1QFY14. Also, transformer prices have stabilized, albeit at lower levels.

Competitive intensity is showing signs of moderation given (1) the poor execution

track record of new entrants, (2) stringent evaluation by PGCIL, including a 2-stage

bidding process, and (3) decline in participation by Koreans, given requirement of

domestic manufacturing. Thus, the quality of competition should improve.

April 2013

Capital Goods

Power products' revenues show contrasting trends (ttm, % YoY), Margins have eroded but show signs of stabilization (% EBIT

with coverage companies witnessing improved demand

margins, ttm)

Source: Company, MOSL

CRGO prices show stabilizing trend

Demand for distribution transformers subdued (MVA)

Source: Company, IEEMA

Another important

demand driver,

particularly for large

players, is that the share

of ultra-high voltage

segment in the 12th plan

is increasing and given

that there are only 5-6

players prequalified in

this segment, the

business economics

should possibly improve

765kva to be an important demand driver in 12th Plan

MVA

HVDC

765KVA

400KVA

230/220 KVA

Total

Composition

HVDC

765KVA

400KVA

230/220 KVA

10th Plan

5,000

2,331

35,390

34,171

76,892

6.5

3.0

46.0

44.4

11th Plan

3,000

25,000

58,085

67,277

153,362

2.0

16.3

37.9

43.9

12th Plan

13,000

149,000

45,000

76,000

283,000

4.6

52.7

15.9

26.9

Source: PGWR

April 2013

Capital Goods

Trend #3

Businesses which benefit from power shortages, high energy prices

This segment is benefitting from few structural trends:

(1) continued energy shortages and increased energy pricing, driving demand for

energy efficiency products,

(2) hunt for alternative energy, given demanding regulations coupled with improving

viability, and

(3) increased environmental concerns and stringent regulatory intervention.

These trends have accentuated in the last 12-18 months but given the inertia in the

system, capex finalizations took time. Now as these trends become structural, we

believe that we are fast approaching the period of accelerated project closures,

implying high demand for energy efficiency products, even for existing operations.

Power shortages increase steadily (Base power deficit, ttm)

Power prices, in recent bids, have increased meaningfully

Government regulations have started becoming more demanding

Energy efficiency

An important driver for waste heat recovery products will be The National Mission for Enhanced Energy

Efficiency (NMEEE), which covers all the large energy consuming sectors. These industries are required

to lower their energy consumption levels by specific percentage points till 2015 and credible savings in

energy consumption can be traded on the power exchanges through energy efficiency certificates.

As against a biomass power capacity potential of 18,000MW, the installed capacity in India stands at

just ~1,800MW. Several states have offered various incentives. MNRE plans to shortly launch The National

Bio Energy Mission to act as a platform for achieving this potential, and envisages capacity addition

of 9,950MW by the end of the 13th Plan (FY22).

The Jawaharlal Nehru National Solar Mission (JNNSM) released its phase-2 draft policy in December

2012, which envisages addition of 9GW capacity during FY13-17. Of this, 6.3GW will be solar PV and

2.7GW will be solar thermal.

Several state governments have also imposed renewable purchase obligation (RPO) mandates on

captive users, which has led to incremental costs to be offset through purchase of Renewable Energy

Certificates from the power exchanges. Setting up of solar thermal applications for process applications,

also provides a cost-effective mechanism to industries to offset the increased costs.

Civic administration makes it mandatory for several industries, commercial establishments like offices,

hotels, etc, and even large residential complexes to have their own effluent / sewage treatment

facilities. TMX is a key player in this segment. Recycling of water is again an important driver, and there

exist pressures on many companies to build water recycling facilities.

Source: Company, MOSL

Biomass

Solar

Renewable purchase

obligations for

captive users

Water

April 2013

Capital Goods

Top picks L&T, Cummins, Thermax

LT, KKC and TMX remain our top picks. SIEM is a strong play on the macro environment,

and in the case of CRG, the turnaround in overseas business will be an important

stock price driver.

Comparative Valuations

Company

M-Cap

CMP

EPS (INR)

P/E (x)

EV/EBITDA (x)

RoE (%)

(USD b) (INR) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E

ABB#

Neutral

2.1

511

6.5

11.0

16.3

79.2

46.3

31.3

30.7

26.3

18.9

5.4

8.8 12.1

BHEL

Neutral

8.6

182

24.0

18.5

13.3

7.6

9.9

13.7

4.8

5.5

6.6

21.5

14.7 14.7

BGR Energy Neutral

0.3

193

23.1

19.4

19.1

8.4

9.9

10.1

5.7

5.5

6.0

14.2

11.1 10.4

Crompton

Buy

1.2

2.8

7.9

12.5

34.0

11.9

7.5

15.8

7.1

4.7

(1.4)

13.0 18.6

Cummins

Buy

2.7

500

25.3

28.4

33.0

19.8

17.6

15.2

15.0

12.4

10.3

31.7

31.0 31.9

L&T

Buy

16.3 1,395

82.8

87.0 100.5

16.8

16.0

13.9

14.4

12.4

11.3

16.6

15.6 15.4

Siemens## Neutral

3.4

530

14.5

21.8

27.0

36.5

24.3

19.6

17.2

12.3

10.3

12.5

17.4 19.6

Thermax

Buy

1.3

566

25.6

27.3

37.8

22.1

20.7

15.0

13.9

10.9

7.5

17.6

16.8 20.7

Havells

Buy

1.5

630

33.0

40.3

48.1

19.1

15.6

13.1

9.9

9.8

7.8

29.5

28.5 27.1

# Year end December; ## Year end September

Rating

L&T trading at lowest EV/order book (x)

L&T trading at only 4% premium to sensex

90%

Average

11.3%

Average

32%

-3.6%

-2.7%

KKC valuations depends upon power availability across cycles

TMX has witnessed a PER re-rating in the past cycle

KKC traded at a

discount as the

outlook for utility

power generation

improved post the

KKC traded at a premium , as the utility Electricity Act 2003

power generation segment faced multiple

headwinds leading to a collapse in the

investment cycle

Re-emergence

of multiple

headwinds for

utility power-

gen has again

entailed

premium

valuations for

KKC

April 2013

Capital Goods

Companies

BSE Sensex: 18,865

S&P CNX: 5,704

April 2013

Company Name

Top Picks

Larsen & Toubro

Cummins India

Thermax

Others

ABB

BGR Energy

BHEL

Crompton Greaves

Siemens

Pg.

26-32

33-37

38-44

45-50

51-55

56-60

61-65

66-72

April 2013

April 2013

Update | Sector: Capital Goods

Larsen & Toubro

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR1,395

TP: INR1,714

Buy

Standing tall amidst turbulence

Adaptability and exposure to diverse segments driving intake

Bloomberg

Equity Shares (m)

LT IN

608.9



M.Cap.(INR b)/(USD b) 849.3/15.7

52-Week Range (INR) 1,720/1,106

1,6,12 Rel. Perf. (%)

0/-13/-2

Valuation summary (INR b)

Y/E March

2013E 2014E 2015E

Sales

623.7 696.8 765.6

EBITDA

67.1 78.4 85.6

Adj PAT *

50.7 53.2 61.5

EPS (INR)*

82.8 87.0 100.5

EPS Gr. (%)

6.2

5.1 15.5

BV/Sh (INR) 470.4 529.3 594.7

RoE (%)

16.6 15.6 15.4

RoCE (%)

13.5 12.9 13.0

Payout (%)

29.3 28.9 28.9

Valuation

P/E (x)*

16.8 16.0 13.9

P/BV (x)

3.0

2.6

2.3

EV/EBITDA (x) 13.3 11.6 11.0

Div Yield (%) 1.4

1.5

1.6

Consolidated*



LT has weathered the macro headwinds much better than peers. Adaptability and

exposure to several segments have enabled LT to increase its market share in terms

of order intake as a percentage of net projects added (as reported by CMIE) from 2-

2.5% in FY09/10 to ~10% currently. E&C order intake (domestic) has remained stagnant

at ~INR600b on ttm basis since 4QFY10; net project additions have declined from

INR19t-20t per year to INR6t now. Stagnation in order intake would start impacting

revenue growth, with domestic E&C revenues declining 6% YoY in 3QFY13. We model

E&C EBIDTA margins at 12%/11.5% in FY14/FY15, from peak levels of 14.2% in FY11.

We expect FY13/FY14 to be an inflexion point in LT's attempt to diversify

geographically and reduce dependence on the domestic economy. We estimate that

the overseas business would contribute 33%/36% of profits in FY13/FY14, up

significantly from ~21% in FY12. This would be driven by: (1) increased contribution of

overseas service business from 10% of consolidated profits in FY12 to 14% in FY14,

and (2) incremental growth from new geographies (Middle East, Australia, SE Asia) /

new segments (hydrocarbons, large sized projects).

Another important challenge for LT is the exposure to segments like Heavy Engineering,

Fabrication, Manufacturing JVs (BTG, shipbuilding, forging), etc; several of these

businesses will need fresh capex and could witness continued pressure in the medium

term. However, over a longer period, we believe that these businesses provide an

opportunity to double market share in the next cycle from the long period average

(LPA) of 1.5% to 3% of GFCF. Several of these businesses are difficult to replicate and

LT is positioned as a dominant player.

We believe that LT is a double-barreled engine to economic recovery, with core

business having robust operating leverage. Attempts to correct the capital structure

will act as a strong RoE trigger. The key challenge is the constrained macro environment.

Maintain Buy, with an SOTP-based price target of INR1,714.

Standalone E&C (revenues at INR453b out of total INR531b)

Consolidated revenue composition [FY12; INR643b]

April 2013

Larsen & Toubro

Exposure to multiple segments provides ability to weather the macro

environment

LT derives over 26% of consolidated revenues from Manufacturing (including MIP,

EBG, etc), Software Development, Engineering Services, Financing Activities, etc.

Several of these segments are relatively insulated from the slowdown in

greenfield capex in the economy.



Even within the Construction segment (which contributes 74% of consolidated

revenues), Civil / Infra Construction accounts for 59%, with the balance coming

from Plant, Machinery, Equipment, etc. Civil / Infra Construction contribute ~45%

of LT’s consolidated revenues. Within this, Buildings and Factories (25%) are on

negotiated basis while Power (20-25%) includes of overseas T&D, which is

relatively insulated.



Over the years, LT has continuously evolved by building new skill sets and

competencies to effectively benefit from emerging trends and opportunities.

This has also enabled the company to weather macro volatility better than its

peers. In the last few years, Buildings & Factories, Process Industries and Power

have been the key growth drivers. Overseas Markets, Urban Infrastructure and

Railways are likely to emerge as important drivers, going forward.



An important challenge for LT is its exposure to segments like Heavy Engineering,

Fabrication, etc, which includes Plant & Machinery. Manufacturing comprises ~20%

of consolidated revenues and could witness headwinds if fresh capex takes time

to recover. Margins have already eroded significantly, with increased competitive

intensity in these segments. The management has stated that margins in

Hydrocarbons / Process Industry orders are comparable to Construction orders.



Gearing the overseas juggernaut

We expect FY13/FY14 to be an inflexion point in LT's attempt to diversify

geographically and reduce dependence on the domestic economy. We estimate

that the overseas business would contribute 33%/38% of profits in FY13/FY14, up

significantly from ~21% in FY12.



This would be driven by: (1) increased contribution of overseas service business

from 10% of consolidated profits in FY12 to 14% in FY14, and (2) incremental growth

from new geographies (Middle East, Australia, SE Asia) / new segments

(hydrocarbons, large sized projects).



Overseas business an important driver (INR b)

FY12

E&C, MIP, Electricals

FZE

IES

Infotech

Total

L&T Consolidated

% Share

124

643

19%

Revenues

FY13E

FY14E

104

195

121

232

FY15E

145

273

FY12

3.8

1.5

1.1

3.8

10.1

47.7

21%

Net Profit

FY13E

FY14E

7.1

2.8

1.9

5.0

16.8

50.7

33%

8.0

3.6

2.9

5.6

20.1

53.2

38%

FY15E

9.5

4.4

3.9

6.3

24.1

61.5

39%

FY12

6.2

2.4

1.7

6.2

16.5

78.4

21%

EPS (INR/sh)

FY13E

FY14E

11.6

4.6

3.2

8.2

27.6

83.2

33%

Source:

FY15E

13.1

15.7

6.0

7.2

4.8

6.4

9.2

10.3

33.0

39.6

87.4

101.0

38%

39%

Company, MOSL

April 2013

Larsen & Toubro

E&C: Domestic revenues witnessing headwinds, but overseas revenues growing

Domestic E&C revenues impacted by macro headwinds;

Overseas E&C revenues have increased meaningfully (INR b)

showing signs of stagnation (INR b)



Domestic E&C business revenues have been witnessing



Overseas revenues have increased to INR89b on ttm basis,

stagnation at INR430b-440b (ttm basis) over the last three

quarters. This is largely due to the stagnating trend in order

intake at INR600b ttm since 4QFY10.

in line with order intake. We understand that the attempt is

to increase the intake in overseas markets to ~INR200b,

which will again support revenue growth.

Mid-value product businesses showing signs of

margin stabilization (%, ttm)

IES is also an important driver of profitability



Both, EBG and MIP businesses are showing initial signs of



Integrated Engineering Services is becoming an important

stabilization in margins. This is due to exposure to short-

cycle products.

contributor to standalone operations, and is supporting

aggregate margins.

LT: E&C segment margins expected to decline,

given increased competitive pressures (%, ttm)

NWC expected to deteriorate marginally,

as the share of PSU projects increase (days)



We model E&C EBITDA margins at 12% in FY14 / 11.5% in FY15,



We expect NWC to deteriorate from 17% of revenues in

down from peak levels of 14.2% in FY11.

April 2013

September 2012 to ~21% of revenues in FY15.

Larsen & Toubro

Manufacturing JVs: Headwinds persist, attempting to defend investments



LT's manufacturing JVs in segments like Power BTG, Shipbuilding, Forging, etc

could witness continued pressure in the medium term. However, over a longer

period, we believe that these businesses provide an opportunity to double market

share in the next cycle from the long period average (LPA) of 1.5% to 3% of GFCF.

Partner

Mitsubishi

Project Cost

(INR b)

Strategy to mitigate losses

PAT breakeven in FY12. Achieved 80% localization

in boilers and 70% in turbines.

Attempt to cater to outsourcing opportunities,

given the Indian cost advantage

L&T has been shortlisted to form a JV with Mazgaon

Dock (for submarines), and we believe that this is

an important milestone as provides L&T an entry

into the naval business.

Stake sale:

Japan Times reported in June 2012 that

Mitsubishi looking to buy stake

Formed JV with Mitsubishi in Dec 2011 for technical

support for construction of commercial vessels.

This may lead to part fixed cost absorption.

Attempt to partly cover fixed costs through

hydrocarbons and industrial forgings

Attempt for part equity stake sale, with

committed capacity tie-up

Source: Company/MOSL

Manufacturing JVs: Project economics constrained; attempting to mitigate losses

Project/

(Stake)

Power BTG

(74%)

Several of these

businesses are difficult to

replicate and LT is

positioned as a dominant

player. We believe that

strategy is to defend the

investments given their

long-term growth

potential, even

sacrificing near-term

return ratios, if need be

Shipbuilding

(100%)

Forging

(74%)

Nuclear Power

Corporation

Larsen and Toubro: Sum of the parts

Method

Construction Business

L&T Standalone

International Ventures (L&T FZE)

Service Segments

Infotech

Finance

General Insurance

Sapura Shipping

L&T Realty

Asset Ownership / Project Developer

Infrastructure Development Projects

Power Development Projects

Manufacturing Ventures

- Power Equipments

- Special Steel and Heavy Forgings

- L&T Komatsu

- Audco India

- EWAC Alloys

Less: Holding Company Discount

Total

April 2013

Valuation

multiple

15.0

10.0

1.75

1.0

1.5

1.0

0.5

Value

(INR b) (INR/sh)

733

101

1,204

109

115

136

141

Rationale

FY15E PER (x)

FY15E

PER (x)

PBV (x)

At par with Market average

At par to second tier IT companies

At par with NBFCs

At par with industry average

FY15E PBV (x)

Lower than Net Worth to capture the

macro volatility

At 50% of BV, to factor in the challenges

of fuel availability

At Book Value, given the

business headwinds

In line with industry average

Revenue growth and margins have

shown strong consistency

In line with industry average

Holding company discount of 20%

Source: Company/MOSL

FY15E PBV (x)

FY15E PER (x)

1.0

10.0

-102

1,714

Larsen & Toubro

L&T: Operational Matrix

FY08

Order Intake (INR b)

Growth (%)

Process

Oil & Gas

Power

Infrastructure

Others

Order Intake (INR b)

Domestic

Growth (%)

Overseas

Growth (%)

Order Book (INR B)

Growth (%)

Process

Oil & Gas

Power

Infrastructure

Others

-Out of which Power BTG

BTB (x)

BTB (x) Ex-Power

BTB (x) E&C

BTB (x) E&C Ex-Power

Gross Revenues (INR b)

Growth (%)

E&C

MIP

EBG

EBITDA (INR b)

E&C

MIP

EBG

EBITDA Margin (%)

E&C

MIP

EBG

Standalone EPS (INR/sh)

Consolidated EPS (INR/sh)

RoE (%) [Standalone]

RoE (%) [Consolidated]

Working Capital (% of sales)

420

105

130

420

361

527

121

190

FY09

516

129

201

516

450

703

112

155

288

2.1

2.0

2.5

2.4

340

280

13.0

12.9

20.1

13.2

46.0

51.3

21.7

21.8

9.3

FY10

696

139

230

188

696

661

-47

1,002

160

150

301

331

134

2.7

2.3

3.1

2.7

370

318

14.5

13.6

22.1

15.7

51.4

61.6

17.4

22.3

5.5

FY11

798

128

255

303

798

718

129

1,302

208

156

417

469

231

3.0

2.4

3.4

2.8

439

377

14.2

13.6

21.2

16.7

55.8

69.7

16.6

17.3

6.7

FY12

706

-12

148

339

706

579

-19

127

1,457

219

146

408

627

162

2.7

2.4

3.1

2.7

531

465

13.2

12.7

19.5

12.7

66.4

78.0

17.8

15.1

12.0

FY13E

820

156

423

820

660

160

1,659

213

155

409

818

105

2.7

2.5

3.1

2.9

618

542

12.3

12.5

14.0

11.0

70.2

82.8

16.6

FY14E

845

107

187

381

845

645

-2

200

1,815

217

185

440

897

2.6

2.5

3.0

2.9

690

602

12.5

12.0

15.0

12.0

75.4

87.0

15.6

FY15E

914

103

129

224

362

914

674

240

1,971

233

217

497

927

2.6

2.5

3.0

2.9

758

653

12.2

11.5

15.0

12.5

79.9

100.5

15.4

2.1

2.7

252

190

12.9

12.8

18.9

17.0

34.8

39.1

22.0

22.6

7.1

14.9

17.2

20.4

Source: Company, MOSL

April 2013

Larsen & Toubro

Financials and Valuation

Income Statement

Y/E March

2010

Total Revenues

373,556

Growth Rate (%)

8.8

Excise Duty

3,208

Net Revenues

370,348

Growth Rate (%)

9.1

Manufacturing Expenses

285,374

Staff Cost

23,791

S G &A Expenses

13,789

EBITDA

47,394

Growth Rate (%)

21.6

EBITDA Margin (%)

12.8

Depreciation

3,797

EBIT

43,597

Net Interest

5,053

Other Income

7,422

Non-recurring Other Income

2,280

Add: Trf to Rev. Res.

Profit before Tax

48,259

Tax

16,409

Effective Tax Rate (%)

34.0

Reported Profit

43,760

EO Adjustments

11,910

Adjusted Profit

31,850

Cons. Profit (Adj)

37,110

Growth (%)

23.5

2011

442,961

18.6

3,902

439,059

18.6

334,681

28,301

19,778

56,299

18.8

12.8

5,905

50,394

6,193

9,106

2,369

55,686

19,436

34.9

39,580

3,329

36,250

42,416

14.3

2012

537,378

21.3

5,673

531,705

21.1

410,202

36,635

22,230

62,639

11.3

12.2

6,817

55,822

6,661

13,078

305

62,554

18,538

29.6

44,566

550

44,826

47,730

12.5

2013E

623,690

16.1

6,584

617,107

16.1

484,053

41,031

24,948

67,076

7.1

10.9

8,196

58,879

9,200

15,254

2,000

66,943

19,748

29.5

49,483

2,289

47,846

50,677

6.2

2014E

696,753

11.7

7,355

689,398

11.7

538,025

45,134

27,870

78,369

16.8

11.4

8,886

69,482

9,800

13,654

73,346

22,667

30.9

50,679

53,244

5.1

(INR Million)

2015E

765,564

9.9

8,081

757,482

9.9

591,587

49,647

30,623

85,625

9.3

11.3

9,585

76,041

9,800

15,198

81,449

25,249

31.0

56,200

61,478

15.5

Balance Sheet

Y/E March

Equity Capital

Reserves and Surplus

Net Worth

Debt

Deferred Tax Liability

Capital Employed

Gross Fixed Assets

Less : Depreciation

Add : Capital WIP

Net Fixed Assets

Investments

Inventory

Sundry Debtors

Cash & Bank

Loans & Advances

Other Current Assets

Current Assets

Current Liabilities

Net Current Assets

Capital Deployed

E: MOSL Estimates

April 2013

2010

1,204

181,912

183,116

68,008

774

251,899

72,901

17,916

8,742

63,727

137,054

14,154

111,584

14,319

60,365

63,532

263,883

212,765

51,118

251,899

2011

1,218

217,245

218,463

71,611

2,635

292,708

89,465

23,025

7,713

74,153

146,848

15,772

124,276

17,296

82,253

110,501

350,099

278,392

71,707

292,708

2012

1,224

251,005

252,229

98,958

1,330

352,517

105,544

29,495

7,587

83,636

158,719

17,766

187,298

17,781

91,280

120,448

434,574

324,411

110,163

352,518

2013E

1,224

286,679

287,903

115,000

1,330

404,233

128,631

37,692

4,500

95,440

140,870

18,513

234,501

45,933

103,845

137,035

539,827

371,903

167,924

404,233

2014E

1,224

322,731

323,955

120,000

1,330

445,285

138,631

46,578

4,500

96,553

159,631

20,682

261,971

38,301

112,322

152,939

586,215

397,115

189,100

445,285

(INR Million)

2015E

1,224

362,710

363,934

120,000

1,330

485,264

149,631

56,163

4,500

97,968

187,539

22,724

287,843

12,203

120,590

167,918

611,278

411,521

199,757

485,264

Larsen & Toubro

Financials and Valuation

Ratios

Y/E March

Basic (INR)

Adjusted EPS

Growth (%)

Consolidated EPS

Growth (%)

Con. EPS (Fully Diluted)

Growth (%)

Cash Earning per Share

Book Value

Dividend Per Share

Div. Payout (Incl. Div Tax ) %

Valuation (x)

P/E (Standalone)

P/E (Consolidated)

Price / CEPS

EV/EBITDA

EV/ Sales

Price / Book Value

Dividend Yield

Return Ratio (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Asset Turnover (x)

Leverage Ratio

Current Ratio (x)

D/E (x)

17.4

14.0

109.0

13.8

1.5

1.2

-0.2

16.6

13.9

102.4

13.0

1.5

1.3

-0.1

2010

52.9

14.3

61.6

20.1

61.6

20.1

59.8

304.1

12.5

27.6

2011

59.5

12.6

69.7

13.0

69.7

13.0

69.4

358.8

14.5

28.4

2012

73.2

23.0

78.0

11.9

78.0

11.9

84.7

412.1

16.5

25.3

19.7

18.5

16.5

14.3

1.7

3.5

1.1

17.8

14.1

127.2

12.1

1.5

1.3

0.0

2013E

78.2

6.7

82.8

6.2

82.8

6.2

91.6

470.4

19.5

29.3

17.8

16.8

15.2

13.3

1.4

3.0

1.4

16.6

13.5

137.2

10.8

1.5

0.1

2014E

82.8

5.9

87.0

5.1

87.0

5.1

97.3

529.3

20.7

28.9

16.8

16.0

14.3

11.6

1.3

2.6

1.5

15.6

12.9

137.2

10.8

1.6

1.5

0.2

2015E

91.8

10.9

100.5

15.5

100.5

15.5

107.5

594.7

23.0

28.9

15.2

13.9

13.0

11.0

1.2

2.3

1.6

15.4

13.0

137.2

10.8

1.6

1.5

0.2

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

(Inc)/Dec in FA

(Pur)/Sale of Investments

Investment in subs

Advances to subs

CF from Investments

(Inc)/Dec in Net Worth

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

April 2013

2010

48,259

4,159

5,053

16,409

11,407

52,469

-15,940

-32,811

-21,606

-1,366

-71,722

23,851

2,448

5,053

7,338

13,908

6,566

7,753

14,319

2011

55,686

6,003

6,193

19,436

-9,338

39,107

-16,429

9,972

-19,766

-9,598

-35,822

7,927

3,603

6,193

8,973

-3,636

2,979

14,319

17,298

2012

62,554

7,005

6,661

18,538

-34,431

23,250

-16,487

4,108

-15,979

-4,703

-33,061

-979

27,347

6,661

9,962

9,745

483

17,296

17,779

2013E

66,943

8,196

9,200

19,748

-28,772

35,819

-20,000

39,028

-21,179

-3,527

-5,678

16,042

9,200

11,119

-4,277

28,153

17,781

44,164

2014E

73,346

8,886

9,800

22,667

-27,057

42,308

-10,000

10,000

-28,761

-2,569

-31,331

(INR Million)

2015E

81,449

9,585

9,800

25,249

-35,778

39,806

-11,000

-27,907

-2,569

-41,477

9,800

14,627

-24,427

-26,097

38,301

13,580

5,000

9,800

13,810

-18,610

-7,632

45,933

39,678

April 2013

Update | Sector: Capital Goods

Cummins India

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR500

TP: INR585

Buy

Buoyant demand environment drives pricing power

Twin trends supporting margins



Bloomberg

Equity Shares (m)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

KKC IN

277.2

550/396

1/-2/-8



M.Cap.(INR b)/(USD b) 138.6/2.6

Valuation summary (INR b)

Y/E March

2013E 2014E 2015E

45.6

8.6

7.0

25.3

27.2

86.1

31.7

31.8

55.6

19.8

5.8

15.1

2.4

52.7 61.8

10.2 12.0

7.9

9.1

28.4 33.0

12.3 16.4

96.9 110.0

31.0 31.9

31.2 32.0

61.9 60.3

17.6

5.2

12.7

3.0

15.2

4.5

10.8

3.4



Net Sales

EBITDA

Adj PAT

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

Payout (%)

Valuation

P/E (x)

P/BV (x)

EV/EBITDA (x)

Div Yield (%)



Domestic demand for DG sets has grown 22-25% in FY13, driven by acute power

shortages, primarily in South India and also in North and West India. The demand

environment could remain buoyant in the medium term, as contentious issues in the

Power sector are yet to be addressed and consensus on key reforms is still awaited.

Also, growth in FY14 is likely to be driven by the full benefit of 5-6% price increases in

FY13 and expected 15-20% increase post implementation of the CPCB norms.

We believe KKC is amongst the best positioned to benefit from any uptick in the

domestic market, as short-cycle products account for most of the revenues (gestation

period of 3-6 months).

In the Industrial business, the key drivers are Mining, Railways and Construction. During

3QFY13, the Industrial/Auto businesses witnessed cyclical uptick, with revenues rising

35%/100% QoQ (YoY decline ~5%). Medium-term growth drivers will be offshore Oil &

Gas (QSK 60), Railways (attempt to influence policy for replacing batteries), new OEM

business (like SANY, Leigeng), Mining, etc.

The initial traction in LHP exports has been encouraging and the revised expectations

are that revenues could increase to INR20b per year in the next 4-5 years (v/s peak

HHP export revenues of INR13b in FY09). The key markets are the Middle East and

South Africa, and India is being established as a global hub for such products. The

Powergen factory (for Urja Gensets) will be commissioned in April/May 2013.

KKC has been showing robust margin performance ( EBITDA margins at 19.1% in 3QFY13)

largely driven by value engineering, cost rationalization programs, etc. However, given

the volatility in commodity prices, unfavorable currency movement, etc, the company

expects that EBITDA margin could decline by 50bp, going forward. We believe

profitabiltiy performance continue to remain strong , supported by (i) twin trends of

INR depreciation and lower commodity prices, and (ii) benefits accruing from 2.5-3%

price hike from June 2012. In our view, further 3% price increase taken in January 2013

will again support margins and expect 4QFY13 EBITDA margin at 19.3%.

We expect KKC to report 17% revenue CAGR over FY13-15, and this will be driven by

25% CAGR in export revenues, while growth in the domestic powergen business is

likely to be muted at 11%. Maintain Buy with a price target of INR585.

KKC would continue to benfit from acute power shortage; higher LHP exports also likely to boost revenues

Revenue compositions

Industrial / Distributions compositions

April 2013

Cummins India

Domestic sales grew strongly, supported by power shortages

Power shortages driving demand, largely in South India



The demand environment could remain buoyant in the medium term, as contentious issues in the Power sector are yet to be

addressed and consensus on key reforms is still awaited. In the Industrial business, the key drivers are Mining, Railways

and Construction.

Pig iron prices declined meaningfully in 4QFY13

EBITDA margin supported by twin trends



We believe profitabiltiy performance continue to remain strong , supported by (i) twin trends of INR depreciation and lower

commodity prices, and (ii) benefits accruing from 2.5-3% price hike from June 2012. In out view, further 3% price increase

taken in January 2013

LHP exports becoming an important growth driver

Depreciating Rupee likely to have positive impact on margins



The initial traction in LHP exports has been encouraging and the revised expectations are that revenues could increase to

INR20b per year in the next 4-5 years (v/s peak HHP export revenues of INR13b in FY09). The key markets are the Middle East

and South Africa, and India is being established as a global hub for such products. The Powergen factory (for Urja Gensets)

will be commissioned in April/May 2013. Weaking INR has also significantly improved KKC's competitive advantage and

possibilities of higher global sourcing from India

April 2013

Cummins India

Operational Matrix

FY07

Segmental Revenue (INR m)

Power

Industrial

Auto

Distribition

Domestic

Exports

Net Sales (before eliminations)

Eliminations

Net Sales

Growth (%)

Revenue Growth (%)

Power

Industrial

Auto

Distribiution

Domestic

Exports

6,964

2,889

963

6,335

12,357

6,050

18,408

23,244

19.2

FY08

10,225

3,526

1,528

6,496

16,455

7,239

23,507

28,899

24.3

FY09

9,970

3,550

1,060

7,590

22,170

13,129

35,299

2,256

33,043

14.3

FY10

10,461

4,400

2,600

8,860

26,321

4,883

31,204

2,755

28,449

-13.9

FY11

13,495

5,588

2,600

10,116

31,799

10,604

42,403

2,949

39,454

38.7

FY12

12,562

5,268

2,431

11,450

31,711

11,908

43,619

3,097

40,522

2.7

FY13E

15,074

4,741

2,067

13,740

35,622

12,503

48,125

3,252

44,873

10.7

FY14E

17,335

5,452

2,067

15,801

40,655

15,004

55,659

3,414

52,244

16.4

FY15E

18,549

6,815

2,377

18,013

45,754

19,505

65,258

3,585

61,673

18.0

17.0

64.6

119.5

10.4

32.7

13.9

46.8

22.0

58.7

2.6

33.2

19.6

-2.5

0.7

-30.6

16.8

34.7

81.4

4.9

23.9

145.3

16.7

18.7

-62.8

29.0

27.0

0.0

14.2

20.8

117.2

-6.9

-5.7

-6.5

13.2

-0.3

12.3

20.0

-10.0

-15.0

20.0

12.3

5.0

Source:

15.0

0.0

15.0

14.1

20.0

Company,

7.0

25.0

15.0

14.0

12.5

30.0

MOSL

April 2013

Cummins India

Financials and Valuation

Income statement

Y/E March

Total Revenues

Change (%)

Raw Materials

Staff Cost

Other Expenses

EBITDA

% of Total Revenues

Depreciation

Other Income

Interest

PBT

Tax

Rate (%)

Adjusted PAT

Extra-ordinary Income (net)

Reported PAT

Change (%)

Adj. Consolidated PAT

Change (%)

2010

28,973

-13.5

18,003

1,983

3,189

5,798

20.0

361

694

6,111

1,670

27.3

4,440

2.4

4,440

0.0

2011

40,425

39.5

25,803

2,546

4,441

7,635

18.9

366

804

8,025

2,114

26.3

5,911

33.1

5,911

33.1

2012

41,172

1.8

26,454

3,039

4,706

6,973

16.9

420

1,233

7,732

2,334

30.2

5,502

514

5,913

0.0

5,502

-6.9

2013E

45,588

10.7

28,584

3,343

5,083

8,578

18.8

470

1,661

9,725

2,796

28.8

7,000

475

7,404

25.2

7,000

27.2

2014E

52,706

15.6

32,783

3,744

5,956

10,223

19.4

575

1,536

11,124

3,263

29.3

7,861

6.2

7,861

12.3

2015E

61,823

17.3

38,485

4,306

6,986

12,047

19.5

650

1,549

12,885

3,737

29.0

9,148

16.4

9,148

16.4

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Deferred Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Investments

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Other Assets

Current Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

2010

396

15,214

15,610

-170

15,527

7,776

4,440

3,337

7,329

12,673

4,097

5,229

559

2,695

7,669

3,768

1,266

2,634

4,301

15,526

2011

396

17,667

18,063

183

-187

18,058

9,144

4,734

4,411

7,255

16,804

5,190

7,182

1,037

3,297

10,325

6,129

894

3,302

5,356

18,058

2012

554

19,877

20,432

-70

20,362

9,703

5,054

4,649

5,976

19,826

5,676

6,783

2,235

5,082

10,509

5,186

1,587

3,736

7,006

20,362

2013E

554

23,388

23,943

-70

23,873

11,203

5,524

5,679

5,976

22,681

6,245

7,494

3,589

5,303

11,263

5,745

1,598

3,919

7,729

23,873

(INR Million)

2014E

554

26,382

26,936

-70

26,867

14,203

6,099

8,104

5,976

24,681

7,220

8,664

3,152

5,595

12,778

6,642

1,849

4,287

8,636

26,867

2015E

554

30,015

30,569

-70

30,500

16,703

6,749

9,954

5,976

28,379

8,469

10,163

3,728

5,970

14,674

7,791

2,171

4,711

9,842

30,500

April 2013

Cummins India

Financials and Valuation

Ratios

Y/E March

Basic (INR)

Adj EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

2010

16.0

17.3

55.7

8.6

62.5

2011

21.3

22.6

64.5

15.0

82.3

2012

19.8

21.4

73.5

11.0

64.2

2013E

25.3

26.9

86.1

12.0

55.6

2014E

28.4

30.4

96.9

15.0

61.9

2015E

33.0

35.3

110.0

17.0

60.3

22.1

20.5

16.3

2.8

6.0

2.5

19.8

18.6

15.1

2.8

5.8

2.4

17.6

16.4

12.7

2.5

5.2

3.0

15.2

14.1

10.8

2.1

4.5

3.4

30.5

30.2

35.5

35.4

28.8

31.7

31.8

31.0

31.2

31.9

32.0

3.7

4.3

4.2

4.0

3.7

3.6

0.0

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

EO Income

CF from Oper. Incl. EO Items

(Inc)/Dec in FA

Investment in subsidiaries

Investment in liquid assets

CF from Investments

(Inc)/Dec in Networth

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

April 2013

2010

6,111

361

1,670

1,455

6,276

(623)

(3,363)

-3,960

-126

1,992

(2,080)

236

323

559

2011

8,025

366

2,114

(1,253)

5,072

(1,440)

-1,366

1,389

4,666

(3,228)

478

559

1,037

2012

7,732

420

2,334

(1,072)

4,800

514

5,315

(2,082)

(148)

1,761

-469

(226)

-183

3,185

(3,648)

1,198

1,037

2,235

2013E

9,725

470

2,796

(723)

6,721

475

7,196

(1,903)

-1,903

(1)

3,892

(3,938)

1,354

2,235

3,589

(INR Million)

2014E

11,124

575

3,263

(974)

7,522

(3,100)

-3,100

(2)

4,798

(4,860)

(438)

3,589

3,152

2015E

12,885

650

3,737

(1,407)

8,452

(2,500)

-2,500

(2)

5,314

(5,376)

576

3,152

3,728

April 2013

Update | Sector: Capital Goods

Thermax

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR566

TP: INR770

Buy

Benefiting from structural trends

Period of exciting readjustment in Energy and Environment businesses



Bloomberg

Equity Shares (m)

M.Cap. (INR b)/(USD b)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

TMX IN

119.2

67.4/1.3

684/402

-3/1/13



Valuation summary (INR b)

Y/E March

2013E 2014E 2015E

Net Sales

52.1 56.5 69.0

EBITDA

4.4

5.1

6.7

Adj PAT

3.0

3.3

4.5

EPS (INR)

25.6 27.3 37.8

EPS Gr. (%)

(24.4)

6.7 38.6

BV/Sh. (INR) 157.4 174.2 197.0

RoE (%)

17.6 16.8 20.7

RoCE (%)

14.8 15.6 19.7

Payout (%)

27.4 33.0 34.4

Valuation

P/E (X)

22.1 20.7 15.0

P/BV (X)

3.6

3.2

2.9

EV/EBITDA (X) 13.4 10.4

7.1

Div Yield (%)

1.2

1.6

2.3



TMX is benefiting from structural trends such as (1) continued energy shortages and

higher energy prices, driving demand for energy efficiency products, (2) hunt for

alternative energy, given demanding regulations and improving viability, (3) increasing

environmental concerns and stringent regulatory intervention, (4) INR depreciation

leading to increased possibilities for exports (currently 22% of revenues).

There are also initial signs that the capex environment in base sectors (like Food

Processing, Pharmaceuticals, Textiles, Chemicals, Engineering, etc) is improving. Few

large Cement / Refinery projects are likely to be awarded in 1HFY14, improving order

intake visibility.

We expect TMX to report acceleration in revenue growth, driven by improvement in

GFCF (particularly in base industries) and interplay of several structural trends. The

company's revenues have been largely stagnant over FY11-13, impacted by

macroeconomic volatility, and we expect 14% CAGR over FY13-15. While exports would

grow at 27% CAGR, the domestic business is likely to grow at 10% CAGR. NWC has been

in a tight range of ~15 days (as at September 2012).

We believe that the key challenge is to sustain double-digit margins, given the

constrained environment. The management has stated that while the bid margins

remain constrained, it is attempting to improve them over the project execution period

through process efficiency, value engineering, cost optimization, etc. Another important

challenge is the Power BTG JV with Babcock (51% stake, TMX), as we believe that

businesses exposed to heavy products will witness elongated periods of constrained

environment. We expect losses of INR1.3b in FY14, and this remains an important

overhang.

We maintain Buy, with a price target of INR770 (18x FY15E EPS, LPA) and 1x BV for

investments in subsidiaries.

TMX: Revenue composition

April 2013

Thermax

Revenues supported by structural trends

TMX is a dominant player in most of its business segments, with a market share of 25-

35% (except Water, where its market share is 10-15%). Standard Products (heating

products, baby boilers, package boilers up to 30 tons capacity, absorption cooling and

chilling, water treatment plants for commercial / residential units, etc) contribute

~40% of revenues. Power (EPC) contributes ~25% of revenues and the division is

exposed to both medium and small projects. We believe TMX's dominant positioning

in each of its segments coupled with high content of short cycle / early cycle businesses

would support revenues in a constrained environment. The project business as also

the large value product business could witness margin pressures; however, the

management is confident of sustaining double-digit margins through initiatives like

productivity enhancement, value engineering, tight control on costs, etc. Also,

relatively higher export content at 22% of revenues and niche product offerings would

also provide margin cushion.

Domestic revenues strongly correlated with macro trends

Order intake showing signs of stabilization



TMX's domestic revenues (excluding Power EPC) are strongly



Standard Products constitute ~40% of TMX's revenues and

correlated with gross fixed capital formation, with a

coefficient of 0.69x since 2004.



We have excluded EPC revenues, as the Project business is

relatively insulated in the interim periods, given the order

backlog.

are largely exposed to base industries, supporting intake.

Also, TMX also has been a beneficiary of few structural

trends.

Revenues impacted by constrained environment

(Growth, % YoY, ttm)

Margins stabilizing in Energy business at 10%+ levels

(EBIT, %, ttm)



Revenue growth rate was impacted by poor intake in 2HFY12.



EBIT margins have corrected from peak levels of 14-15% in

During FY13, order intake has improved to INR12b/quarter v/

s INR7b/quarter in 2HFY12; the decline should be arrested.

April 2013

FY07 to 10.6%. The attempt is now to sustain this, and could

be challenging.

Thermax

Key business drivers

Apart from the structural trends, we believe that improvement in TMX's business

environment will be contingent on two factors: (1) possible award of large projects at

reasonable margins in segments like Hydrocarbons, Fertilizers, Cement, etc, where

the project pipeline is robust, and (2) increased traction in overseas business. We

expect 14% revenue CAGR over FY13-15; while exports would grow at 27% CAGR, the

domestic business is likely to grow at 10% CAGR.

Several greenfield /

expansion projects in

segments like Hydrocarbons,

Fertilizers and Cement are

likely to be awarded in FY14.

The addressable opportunity

for TMX in several of these

projects stands at INR4b-8b

each. The competitive

intensity is expected to be

severe.

#1. Addressable market meaningful, given the Hydrocarbon, Fertilizer and Cement capex

Reliance

PSU refineries

Fertilizers

Cement

Environmental

11 x 90MW CPP; also INR4b-5b order for Petchem expansion

Kochi Refinery (INR6b-8b), expect 5-6 refinery expansions to be awarded in

FY14 (INR4b each)

Expect 7m-8m tons of capacity to be awarded (INR4b/project)

Expect 12m-15m tons to be ordered in FY14 - CPP (25MW/m ton) and process

boiler (INR1.5b/project)

WHR Boilers - expect 5-6 awards per annum of 10MW each

Source: Company, MOSL

#2. Overseas business is an interesting growth driver

Exports as a percentage of revenues expected to

increase meaningfully

Expanding geographic base: Africa and Europe emerging as

important markets (# Rank in TMX portfolio)

#4 Europe

#2 West

Asia

Africa

#1 SE

Asia



TMX derives 22% of its revenues from exports (including deemed exports), and this percentage has been fairly stable over

the last decade. Given the access to new products and new markets, we expect the contribution of exports to improve

me aningfully to 29% of revenues in FY15.The management has recently stated that the internal target is that overseas

business should contribute one third of total revenues.

April 2013

Thermax

TMX: Managing transition to the 'Big League' in the next economic upturn (Revenues - INR b)

TMX: KEY GROWTH DRIVERS



TMX has emerged as a global player in various products like vapour Absorption

Chillers, Heating, Heat Recovery Steam Generators, etc. Still, apart from

absorption chillers, its market share in overseas geographies stands at just

2-3% in most product segments. We believe that the recent currency movements

provide opportunities to expand the contribution of the overseas business.



Green portfolio comprises ~30% of revenues, Exports at 22%, Standard products

at 35-40%. Many of these portfolios benefit from the structural trends in the

economy and also provide support in

down-cycle.



Within India, TMX has a dominating market share of ~25-35% in most of the

segments it operates in (except water, where the market share is 10-15%).

Atempts being made to bridge the gap.



During the current downcycle (FY10-13), it has absorbed various technologies

and acquired companies (including access to overseas markets) to enhance

the product offerings.

Possibly managing

transition to ‘Big League’

driven by:

New growth areas:

Water, Renewables,

Exports, Gas

equipments

Structural trends:

Energy pricing,

Regulations,

Environmental

concerns

April 2013

Thermax

Operational Matrix (INR m)

FY11

Standalone Order intake

Energy

- Power EPC

- Energy Ex Power EPC

Environment

Order intake growth (%)

Energy

- Power EPC

- Energy Ex Power EPC

Environment

Standalone Revenues

Energy

Environment

% YoY

Energy (%)

Environment (%)

Revenue composition

Domestic (excl Power EPC)

Domestic (Power EPC)

Exports

% YoY

Domestic (excl Power EPC)

Domestic (Power EPC)

Exports

EBIT Margin (%)

Energy

Environment

EPS Composition (INR/Sh)

Standalone

TMX-Babcock JV

Other Subsidiaries

Consolidated

53,180

41,736

15,300

26,436

11,444

-8.3

-10.0

-28.5

5.8

-1.2

50,235

38,796

11,439

54.5

60.9

35.9

50,235

24,565

15,010

10,660

54.5

22.0

157.5

62.5

11.8

10.0

12.6

FY12

40,300

28,830

5,169

23,661

11,470

-24.2

-30.9

-66.2

-10.5

0.2

54,360

41,509

12,851

8.2

7.0

12.3

54,360

27,530

15,400

11,430

8.2

12.1

2.6

7.2

11.1

10.8

12.5

FY13E

51,000

39,000

17,500

21,500

12,000

26.6

35.3

238.6

-9.1

4.6

47,261

35,442

11,819

-13.1

-14.6

-8.0

47,261

25,078

11,842

10,341

-13.1

-8.9

-23.1

-9.5

10.4

10.7

10.1

FY14E

62,550

48,750

20,000

28,750

13,800

22.6

25.0

14.3

33.7

15.0

50,918

37,597

13,321

7.7

6.1

12.7

50,918

25,914

12,077

12,927

7.7

3.3

2.0

25.0

10.7

11.0

FY15E

79,935

63,375

27,000

36,375

16,560

27.8

30.0

35.0

26.5

20.0

61,740

46,784

14,957

21.3

24.4

12.3

61,740

28,382

16,554

16,805

21.3

9.5

37.1

30.0

11.0

11.3

11.5

32.1

0.0

-0.1

32.0

34.1

-0.8

0.5

33.9

28.4

-2.2

-0.5

25.6

31.5

39.9

-5.5

-5.7

1.4

3.6

27.3

37.8

Source: Company, MOSL

April 2013

Thermax

Financials and Valuation

Income Statement

Y/E March

Total Revenues

Change (%)

Raw Materials

Staff Cost

Other Expenses

EBITDA

% of Total Revenues

Depreciation

Other Income

Interest

PBT

Tax

Rate (%)

Adjusted PAT

EO Income (net)

Reported PAT

Change (%)

2010

32,742

-3.8

20,271

3,300

6,160

3,947

12.1

442

519

4,004

1,432

35.8

2,568

-1,149

1,419

-50.9

2011

52,472

60.3

34,803

4,547

8,266

5,669

10.8

541

652

5,736

1,965

34.3

3,818

169.0

2012

60,313

14.9

38,435

5,578

10,795

5,919

9.8

663

830

122

5,964

2,043

34.3

4,034

5.7

2013E

52,051

-13.7

32,959

5,439

9,914

4,397

8.4

763

911

195

4,350

1,558

35.8

3,050

-24.4

2014E

56,516

8.6

35,497

6,135

10,466

5,144

9.1

1,220

1,073

556

4,440

1,819

41.0

3,254

6.7

2015E

69,002

22.1

43,203

6,817

13,095

6,684

9.7

1,279

1,199

563

6,041

2,188

36.2

4,509

38.6

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Deferred Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Other Assets

Current Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

2010

238

10,544

10,926

144

11,099

7,418

2,048

5,369

115

3,703

23,712

2,563

7,984

6,702

3,282

3,181

2011

238

12,911

13,448

1,480

299

15,448

10,678

2,825

7,853

354

2,415

30,370

3,657

10,209

6,880

4,015

5,610

2012

238

16,055

16,671

2,704

378

20,491

11,929

3,488

8,441

2,466

2,395

33,427

3,666

13,707

6,983

3,560

5,512

2013E

238

18,135

18,751

2,704

378

22,315

13,929

4,251

9,678

400

2,395

32,207

3,123

11,451

8,965

3,463

5,205

(INR Million)

2014E

238

20,143

20,759

2,704

378

23,689

14,929

5,471

9,457

400

2,395

37,576

3,391

11,303

14,153

3,642

5,086

2015E

238

22,852

23,468

2,704

378

25,742

15,929

6,751

9,178

400

2,395

48,542

4,140

13,800

20,250

4,141

6,210

7,583

2,359

1,368

1,318

11,099

8,928

3,264

2,782

4,825

15,448

9,690

5,495

2,721

7,190

20,491

8,328

4,649

2,349

9,842

22,315

9,043

5,006

2,550

11,437

23,689

12,420

6,005

3,113

13,769

25,742

April 2013

Thermax

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

24.8

24.3

2.9

0.0

31.9

29.0

3.4

0.1

2010

21.6

25.3

91.7

5.0

23.2

2011

32.0

36.6

112.9

9.0

28.1

2012

33.9

39.4

139.9

7.0

20.7

15.1

13.0

9.2

0.9

3.7

1.4

27.4

22.9

2.9

0.2

2013E

25.6

32.0

157.4

7.0

27.4

22.1

17.7

13.4

1.1

3.6

1.2

17.6

14.8

2.3

0.1

2014E

27.3

37.6

174.2

9.0

33.0

20.7

15.1

10.4

0.9

3.2

1.6

16.8

15.6

2.4

0.1

2015E

37.8

48.6

197.0

13.0

34.4

15.0

11.7

7.1

0.7

2.9

2.3

20.7

19.7

2.7

0.1

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

EO Income

CF from Oper. Incl. EO Items

(Inc)/Dec in FA

(Pur)/Sale of Investments

CF from Investments

(Inc)/Dec in Net Worth

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

2010

4,004

442

1,432

5,283

8,317

-1,149

7,168

(838)

(3,109)

218

697

(460)

3,599

3,696

6,726

2011

5,736

541

1,965

(3,880)

477

(3,265)

(1,976)

423

1,401

695

1,084

(416)

6,702

6,880

2012

5,964

663

122

2,043

(1,985)

2,719

(3,361)

(3,342)

(1,439)

1,224

122

1,246

(1,583)

(2,205)

6,880

6,982

2013E

4,350

763

195

1,558

(670)

3,081

295

195

969

(869)

2,277

6,983

8,965

(INR Million)

2014E

4,440

1,220

556

1,819

3,594

7,991

(1,000)

633

556

1,246

(1,169)

5,822

8,965

14,154

2015E

6,041

1,279

563

2,188

3,765

9,460

(1,000)

579

563

1,800

(1,784)

6,676

14,153

20,250

April 2013

April 2013

Update | Sector: Capital Goods

ABB

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR511

TP: INR490

Neutral

Project profitability remains impacted

Focused on cost efficiency; products showing sustained improvement



Bloomberg

Equity Shares (m)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

ABB IN

211.9

860/484

-7/-31/-49



M.Cap.(INR b)/(USD b) 108.3/2.0

Valuation summary (INR b)

Y/E Dec

2012 2013E 2014E

Net Sales

74.7 76.8 83.9

EBITDA

3.6

4.2

5.7

Adj PAT

1.4

2.3

3.5

Adj EPS (INR) 6.5 11.0 16.3

EPS Gr (%)

-25.9 70.9 48.0

BV/Sh (INR) 120.6 129.1 141.6

RoE (%)

5.4

8.8 12.1

RoCE (%)

5.7

8.9 11.7

Payout (%)

25.0 20.0 20.0

Valuations

P/E (x)

128.0 46.3 31.3

P/BV (x)

6.8

4.0

3.6

EV/EBITDA (x) 73.2 26.2 18.8

Div. Yield (%) 0.2

0.5

0.7



ABB continues to face margin pressure across business segments, particularly in project

businesses, impacted by sluggish revenue growth and cost overruns. Profitability in

Power Systems remains subdued, even after complete exit from the Rural Electrification

business, due to low margin legacy orders and cost overruns in several projects.

Profitability in Process Automation also remains subdued, contrary to earlier

expectations of sustained improvement.

ABB's continued focus on cost management has started to yield results, with margins

in product businesses showing sustained improvement, particularly in Power Products.

Profitability in the Discrete Automation business has also been showing sustained

improvement; a large part of the business is based on imports from the parent and the

division has also benefited from favorable currency movement.

CY12 order inflows declined 23% to INR69b despite a large HVDC order worth INR6b

from Power Grid, excluding which orders declined 30%. Overall, demand continues to

be impacted by economic slowdown while competition remains intense, impacting

price realization. However, in pockets like Solar Industry, Data Centers and Energy

Efficiency, the demand environment remains robust. ABB is hopeful of improved ordering

in mid-size projects in the next 2-3 quarters. The management remains cautious of

any pick-up in large orders in the near term although SEB ordering is likely to improve,

led by financial restructuring.

Exports continue to grow at a healthy 20%+. ABB has significantly ramped up

manufacturing capacity in India in the last few years and is now amongst the top three

capital goods exporters in our coverage universe. We expect exports to increase,

largely driven by sales of wind turbine generators from the company's Vadodara facility.

In Process Automation, ABB is also making efforts to build a service portfolio to attain

stability in profit margins.

We believe ABB will be one of the biggest beneficiaries of the ongoing power sector

reforms given its wide presence in high technological products. ABB is amongst the key

players in Smart Grid, which could be a potential growth area, given increased awareness

to improve grid efficiency post the black out of the Northern Grid last year. However,

recoveries in profitability continue to lag expectations. Valuations are rich; maintain

Neutral with a target price of INR490 (30x CY14E EPS).

ABB could possibly be a meaningfull beneficiary of its strong postioning in power products and increased exports from India

Revenue

compositions

Product Revenue

compositions

April 2013

ABB

Project business volatile; impacted by delays

ABB continues to face headwinds in project businesses, impacted by slower

execution / cost overruns. Revenues in both Power Systems and Process

Automation have been on a downtrend after peaking out in 3QCY11, impacted by

sluggish order intake and slower execution due to delayed offtake by customers.



In Process Automation, ABB is making efforts to build a service portfolio to attain

stability in profit margins. The recently operationalized government scheme,

"Perform Achieve Trade" aims at improving energy efficiency through a 'carrot

and stick' mechanism, which will lead to increased traction in Drives (~10% of

ABB's revenues). We believe ordering from SEBs should also improve, supported

by balance sheet restructuring.



Sluggish industrial demand impacting Automation revenues

Execution of HVDC orders likely to support revenues

Profitability remains under pressure, impacted by cost

overruns and slower offtake by customers

Profitability in Power Systems hit by intensifying

competition

Source: Company, MOSL

Product profitability showing signs of stabilization

On the positive side, ABB's continued focus on cost management has started to

yield results, with margins in product businesses showing sustained improvement,

particularly in Power Products.



Revenues remain constrained due to the tough economic climate, resulting in

sluggish demand from the industrial sector. Both in Power Products as well as

Automation Products, TTM revenues growth remains muted.



April 2013

ABB

Profitability in the Discrete Automation business has also benefited from

favorable currency movement, as a large part of the business is based on imports

from the parent.



Profit margins in Power Products have been showing sustained improvement

despite intense competion.



Automation Products: Revenues impacted by slower

demand from industrial sector

Automation Products: Profit margins showing sustained

improvement, helped by favorable currency movement

Power Products: Revenues impacted by sluggish

orders from SEBs

Power Products: Profit margins improving, led by efficient cost

management

Source: Company, MOSL

Expect margins to show gradual improvement

Though margin recovery is slower than expected, signs of improvement are visible

now, as (1) ABB has largely exited RE works, and (2) the benefits of cost reduction

measures have started to flow in.



We expect gradual improvement in underlying profitability (excluding the impact

of any inordinate project delays) over the next few quarters.



In our view, revenue visibility for CY13/14 remains poor, as CY13 will start with

order backlog being 10% lower than CY12 order backlog.



We believe ABB will be one of the biggest beneficiaries of the ongoing power

sector reforms given its wide presence in high technological products. ABB is

amongst the key players in Smart Grid, which could be a potential growth area,

given increased awareness to improve grid efficiency post the black out of the

Northern Grid last year.



April 2013

ABB

Operational Matrix

Year Ended December

Revenues (INR m)

Automation products

Process automation

Power products

Power systems

Gross Segmental Sales

Inter-segment revenue /other income

Net Sales

Revenue Growth (%)

Automation products

Process automation

Power products

Power systems

Total

Order intake (INR m)

Automation products

Process automation

Power products

Power systems

Gross Segmental Order Intake

Order Intake Growth (%)

Automation products

Process automation

Power products

Power systems

Gross Segmental Order Intake

EBIT Margins (%)

Automation products

Process automation

Power products

Power systems

2007

13,332

11,053

16,326

22,127

62,838

4,530

58,308

2008

17,376

13,334

20,492

23,054

75,065

6,695

68,370

2009

18,022

12,100

19,936

17,192

67,819

5,447

62,372

2010

20,414

11,887

18,155

18,267

68,723

5,852

62,871

2011

23,392

13,219

20,008

23,624

80,243

6,540

73,703

2012

23,926

13,568

20,853

22,422

80,769

6,066

74,703

2013E

25,840

14,247

21,896

22,422

84,404

7,596

76,808

2014E

28,424

15,671

24,523

23,543

92,161

8,295

83,867

45.9

20.4

34.6

46.6

38.0

30.3

20.6

25.5

4.2

19.5

3.7

-9.3

-2.7

-25.4

-9.7

13.3

-1.8

-8.9

6.3

1.3

14.6

11.2

10.2

29.3

16.8

2.3

2.6

4.2

-5.1

0.7

8.0

5.0

0.0

4.5

10.0

12.0

5.0

9.2

14,600

15,395

20,433

30,029

80,457

20,679

15,659

24,062

25,608

86,008

23,042

13,151

23,742

33,478

93,413

19,862

15,336

15,903

18,324

69,425

24,909

11,451

22,568

32,041

90,969

22,418

8,016

20,311

19,225

69,660

25,781

8,817

23,358

23,070

81,025

30,937

10,140

28,029

27,683

96,790

47.0

15.6

33.6

49.1

37.1

41.6

1.7

17.8

-14.7

6.9

11.4

-16.0

-1.3

30.7

8.6

-13.8

16.6

-33.0

-45.3

-25.7

25.4

-25.3

41.9

74.9

31.0

-10.0

-30.0

-10.0

-40.0

-23.4

15.0

10.0

15.0

20.0

16.3

20.0

15.0

20.0

19.5

13.4

12.1

13.0

10.7

13.1

13.9

12.7

8.8

11.2

12.8

10.9

0.4

6.6

6.9

4.5

-6.0

10.3

2.9

5.0

0.0

9.8

-1.1

6.6

-0.6

10.0

2.5

5.0

7.0

8.0

3.0

5.0

Source: Company, MOSL

ABB has invested INR14.3 b over CY06-12 in setting up

manufacturing facilities

ABB has meaningfully ramped up exports (INR M)

Source: Company, MOSL

April 2013

ABB

Financials and Valuation

Income statement

Y/E December

2009

2010

2011

Net Sales

62,372

62,871

73,703

Change (%)

-8.8

0.8

17.2

Raw Materials

21,970

26,166

28,412

Staff Cost

3,892

4,901

5,868

Other Mfg. Expenses

23,801

22,455

27,189

Selling Expenses

5,564

7,309

7,811

Admin. & Other Exp.

1,855

1,202

1,591

EBITDA

5,290

838

2,831

% of Net Sales

8.5

1.3

3.8

Depreciation

485

517

795

Interest

256

174

307

Other Income

726

855

949

PBT

5,274

1,002

2,677

Tax

1,728

370

832

Rate (%)

32.8

36.9

31.1

PAT

3,546

632

1,845

Adjusted PAT

3,546

632

1,845

Change (%)

-33.4

-82.2

191.9

*Adjusted EBITDA margin @5.1% as reported by management

2012

74,703

1.4

27,640

6,162

27,640

8,158

1,494

3,610

4.8*

941

432

1,011

3,247

688

21.2

1,368

-25.9

(INR Million)

2013E

76,808

2.8

28,035

6,654

28,419

8,218

1,306

4,175

5.4

1,155

500

995

3,516

1,179

33.5

2,337

70.9

2014E

83,867

9.2

29,773

7,187

31,031

8,722

1,426

5,729

6.8

1,281

450

1,017

5,015

1,555

31.0

3,460

48.0

Balance Sheet

Y/E December

Share Capital

Reserves

Net Worth

Loans

Net Deffered Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Current Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

2009

424

23,814

24,237

8,792

2,059

6,733

1,163

169

47,493

7,294

28,577

5,241

6,380

31,320

29,869

1,450

16,173

24,238

2010

424

23,813

24,237

-46

24,191

9,977

2,318

7,660

577

168

49,262

6,979

29,260

5,871

7,153

33,476

31,175

454

1,846

15,786

24,191

2011

424

24,921

25,345

-224

25,121

14,618

2,935

11,683

839

507

49,600

9,255

30,825

2,644

6,876

37,509

35,178

2,331

12,092

25,121

2012

424

25,133

25,557

3,277

29,906

16,755

3,511

13,244

700

525

50,783

9,204

32,644

767

8,169

35,347

32,939

2,407

15,437

29,906

(INR Million)

2013E

424

26,931

27,354

2,621

29,976

18,771

4,665

14,106

700

525

52,174

9,469

33,248

1,039

8,417

37,529

36,826

703

14,645

29,976

2014E

424

29,592

30,016

2,097

32,113

20,637

5,527

15,110

700

525

56,992

10,110

35,844

2,306

8,731

41,213

40,210

1,003

15,779

32,113

April 2013

ABB

Financials and Valuation

Ratios

Y/E December

Basic (INR)

EPS

Growth

Cash EPS

Book Value

DPS

Payout (incl. Div.Tax)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

2009

16.7

-33.4

19.0

114.4

2.3

14.0

2010

3.0

-82.2

5.4

114.4

2.3

78.4

2011

8.7

191.9

12.5

119.6

3.5

40.1

2012

6.5

-25.9

10.9

120.6

1.9

25.0

2013E

11.0

70.9

16.5

129.1

2.5

20.0

2014E

16.3

48.0

22.4

141.6

3.8

20.0

87.3

61.0

55.8

2.1

6.4

0.5

128.0

75.8

73.2

2.4

6.8

0.2

46.3

31.0

26.2

1.4

4.0

0.5

31.3

22.8

18.8

1.3

3.6

0.7

15.6

15.3

2.6

3.1

7.4

8.1

5.4

5.7

8.8

8.9

12.1

11.7

167

175

2.6

170

181

2.6

153

174

2.9

159

161

2.5

158

175

2.6

156

175

2.6

0.0

0.1

Cash Flow Statement

Y/E December

PBT before EO Items

Add : Depreciation

Interest

Less : Direct taxes paid

(Inc)/Dec in WC

CF from operations

(Inc)/Dec in FA

(Pur)/Sale of Investments

CF from investments

(Inc)/Dec in Net Worth

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

2009

5,274

485

256

1,728

-582

3,705

-1,585

442

-1,143

-3

256

545

-804

1,759

3,482

5,241

2010

1,002

517

174

370

1,019

2,342

-858

-857

-183

174

498

-854

631

5,241

5,873

2011

2,677

795

307

832

221

3,169

-5,081

-339

-5,420

-175

307

495

-977

-3,228

5,871

2,643

2012

2,056

941

432

688

-4,878

-2,136

-1,663

-18

-1,681

-538

432

739

1,568

-2,249

2,644

766

(INR Million)

2013E

3,516

1,155

500

1,179

919

4,911

-2,716

500

395

-1,550

645

767

1,039

2014E

5,015

1,281

450

1,555

-126

5,065

-2,285

450

540

-1,514

1,267

1,039

2,306

April 2013

April 2013

Update | Sector: Capital Goods

BGR Energy

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR193

TP: INR190

Neutral

Elongating working capital remains the key concern

Aggressive bidding likely to hit profitability



Bloomberg

Equity Shares (m)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

BGR IN

72.0

369/176

-7/-31/-49

M.Cap. (INR b)/(USD b) 13.9/0.3

Valuation summary (INR b)

Y/E March

2013E 2014E 2015E

Net Sales

32.1 33.7 38.7

EBITDA

4.4

4.2

4.3

Adj PAT

1.7

1.4

EPS (INR)

23.1 19.4 19.1

EPS Gr. (%) (25.4) (15.9) (1.9)

BV/Sh. (INR) 170.1 179.1 187.6

RoE (%)

14.2 11.1 10.4

RoCE (%)

11.1

9.8 10.0

Payout (%)

35.4 54.1 55.1

Valuation

P/E (x)

8.4

9.9 10.1

P/BV (x)

1.1

1.0

EV/EBITDA (x) 5.7

5.5

6.0

Div Yield (%) 3.6

4.7



BGR has an order book of INR120b (excluding Darlipalli project for which bid validity

period has expired), implying a BTB of 3.4x TTM sales. Orders from NTPC's first and

second bulk tenders constitute 58% of its order book. Apart from these, BGR is executing

four major projects: Mahagenco's 2x500MW, Chhattisgarh SEB's 2x500MW, Thermal

Powertech Corporation's Krishnapatnam 2x660MW, and EPC order from TRN Energy

for 2x600MW power plant. Thermal Powertech's 2x660MW and TRN Energy's

2x600MW are at peak stage of execution. These two projects along with the NTPC

projects are likely to drive revenues in FY14/15.

We believe profitability will moderate, impacted by aggressive bidding by the company

in key bids, particularly NTPC bulk tendering. The management expects EBITDA margins

of 12-13% on these projects. Initially, very significant part of the components in these

projects would be imported from Hitachi, Japan. The management expects to completely

indigenize manufacturing by the delivery of 7-8 boilers/turbine sets.

BGR has debt of INR21b, largely to finance working capital requirement, as realization

of rentention money has remained poor in several projects. Interest cost has shown

sharp increase because of increase in debt, which has been impacting earnings. We

note that recently, ICRA too downgraded the credit rating of the company from A to

BBB+, which is likely to increase its cost of borrowing by 75-100bp.

We expect EBITDA margins to peak out in FY13. We see gradual decline over FY14-15,

as execution of NTPC orders picks up. In our view, BGR's PAT is likely to remain stagnant,

impacted by lower margins and higher interest cost, though revenues would see

moderate growth, driven by current order book. Any meaningful intake of large ticket

orders could provide upside to our assumptions. Maintain Neutral with a target price

of INR190 (10x FY15E EPS).

Power Projects constitute 85% of BGR's order book

Manufactured Goods contribute ~10% of BGR's revenues

Source: Company, MOSL

April 2013

BGR Energy

Revenue visibility healthy, driven by NTPC orders

Current order book stands at INR120b, which includes INR71b of NTPC orders

(excluding Darlipalli Project worth INR15b, the bid validity project which has

expired).



BGR is executing four major projects: Mahagenco's 2x500MW - INR16.3b (over 75%

complete), Chhattisgarh SEB's 2x500MW - INR16.3b (over 70% complete), Thermal

Powertech Corporation's Krishnapatnam 2x660MW - INR21.7b (~35% complete),

and EPC order from TRN Energy 2x600MW - INR17b (~10% complete). Thermal

Powertech's 2x660MW and TRN Energy's 2x600MW are at peak stage of execution

and these projects are likely to drive revenues in FY14.



NTPC orders would also start contributing from FY14. The company has already

received LoA for all the projects except NTPC Darlipalli, from which the company

has backed out as the bid validity period has expired and the project has yet not

been awarded because of land acquisition issues.



Key projects under execution

Size (MW)

2 x 500

2 x 660

2 x 300

Type

BOP

EPC

Project

Chandrapur

Marwa

Krishnapattnam TPP

TRN Energy, Chattishgarh

Client

MAHAGENCO

CSPGCL,

TPCIL

TRN Energy

Region

INR m

Maharastra

16,318

Chattishgarh

16,337

Andhra Pradesh

21,660

Chattishgarh

16,980

Source: Company, MOSL

NTPC projects in the order book

Size (MW)

2x660

2x800

Type

Boiler

Project

Solapur

Meja

Raghunathpur

Lara

Darlipalli

Region

INR m

Maharastra

18,550

15,000

Orissa

15,000

Source: Company, MOSL

Aggressive quote by BGR; pricing pressure likely to increase

BGR's quote in NTPC's bulk tender-1 is 15% lower than the winning bid quoted by

Doosan for the boiler package of NTPC's bulk tender-2 (9x800MW). Similarly, BGR's

quote for the TG package in bulk tender-2 was 23% lower than the L1 price of

INR13/MW by Alstom in bulk tender-1. Though BGR seems to have bid aggressively,

it expects to generate EBITDA margin of 12-13%.



With the entry of several players, competition in the Indian Power Equipment

space is intensifying. Several players had believed that the aggressive bidding

was just the entry pricing strategy for new entrants and would not sustain.

However, the recent bids in Rajasthan (Suratgarh and Chhabra, 2.64GW) and NTPC

Tanda (1.32GW, boilers) indicate that the aggressive pricing is more structural and

the necessity to absorb fixed cost by BTG players could result in price undercutting.



April 2013

BGR Energy

BGR's balance sheet is increasingly burdened by debt

Net working capital impacted by rise in debtors partly

because of poor cash flows resulting from rising working capital due to non-realization of retention money

Source: Company, MOSL

Rising working capital burdening balance sheet

Rising working capital loans worrying, balance sheet deteriorating: BGR's gross

debt currently stands at INR21b (up from INR13b at the end of FY11), mainly due

to an increase in net working capital due to a rise in debtors and retention money.

The company is facing delays in realization of retention money in some projects.

Retention money currently stands at INR12b.



We expect significant increase in working capital due to declining customer

advances (because of fewer fresh orders) and increase in debtors.



Margin contraction and worsening working capital could result in lower returns

on capital.



The interest cost burden has increased meaningfully in line with rise in debt,

resulting in significant decline in interest coverage ratio. We note that recently,

ICRA too downgraded BGR's credit rating from A to BBB+, which is likely to increase

its cost of borrowing by 75-100bp.



Revenue and earnings to decline from peak of FY11

We believe that prices quoted by BGR in the recent NTPC bulk order awards were

aggressive and will negatively impact its profitability, as it starts executing those

orders.



In our view, it will be challenging for BGR to secure new orders in the foreseeable

future without resorting to aggressive pricing, given upcoming new domestic

capacity of BTG manufacturing in a tough market.



Deteriorating working capital and high leverage in the balance sheet remain

discomforting.



We expect EBITDA margins to peak out in FY13. We see gradual decline over FY14-

15, as execution of NTPC orders picks up. In our view, BGR's PAT is likely to remain

stagnant, impacted by lower margins and higher interest cost, though revenues

would see moderate growth, driven by current order book. Any meaningful intake

of large ticket orders could provide upside to our assumptions. Maintain

Neutral

with a target price of INR190 (10x FY15E EPS).



April 2013

BGR Energy

Financials and Valuation

Income statement

Y/E March

Total Income

Change (%)

Raw Material Cost

Staff Cost

SG&A

EBITDA

Change (%)

% of Net Sales

Depreciation

Interest

Other Income

PBT

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2010

30,779

59.0

24,889

1,262

1,141

3,487

62.9

11.3

103

538

205

3,051

1,037

34.0

2,015

2,016

74.2

2011

47,526

54.4

39,254

1,447

1,537

5,289

51.7

11.1

172

605

195

4,707

1,577

33.5

3,130

3,126

55.1

2012

34,471

-27.5

26,846

1,759

1,231

4,636

-12.4

13.4

161

1,354

144

3,264

1,033

31.7

2,231

-28.6

2013E

32,063

-7.0

24,506

1,970

1,217

4,369

-5.7

13.6

176

1,769

2,484

820

33.0

1,664

-25.4

(INR Million)

2014E

33,667

5.0

25,900

2,364

1,211

4,193

-4.0

12.5

210

1,873

2,176

775

35.6

1,401

-15.9

2015E

38,716

15.0

30,171

2,837

1,393

4,315

2.9

11.1

245

2,060

2,083

708

34.0

1,375

-1.9

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Differed Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Goodwill

Investments

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Other Current Assets

Curr. Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Appli. of Funds

E: MOSL Estimates

2010

720

6,343

7,063

8,075

1,580

16,717

1,819

365

1,454

104

36,438

162

19,803

9,019

7,273

181

21,289

11,028

7,928

2,334

15,148

16,717

2011

722

8,798

9,520

13,270

3,596

26,386

2,508

528

1,980

862

50,222

411

31,033

10,408

8,068

302

26,687

12,002

12,047

2,638

23,535

26,388

2012

722

10,453

11,175

17,468

4,887

33,530

3,790

685

3,104

1,030

55,313

307

31,376

9,407

13,984

238

25,924

13,011

10,211

2,701

29,390

33,530

2013E

722

11,528

12,250

20,983

4,887

38,120

4,356

861

3,494

350

58,997

309

33,351

9,958

15,157

222

24,732

12,077

9,953

2,701

34,265

38,120

(INR Million)

2014E

722

12,171

12,892

23,082

4,887

40,861

4,922

1,072

3,850

350

62,330

327

33,175

14,126

14,468

233

25,680

12,854

10,125

2,701

36,650

40,861

2015E

722

12,787

13,509

25,390

4,887

43,786

5,488

1,316

4,171

350

67,620

381

38,151

13,494

15,326

268

28,367

15,002

10,664

2,701

39,253

43,786

April 2013

BGR Energy

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Growth (%)

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Return Ratio

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

2010

28.0

74.2

29.4

98.1

7.0

29.3

2011

43.3

54.7

45.8

132.2

10.0

26.9

2012

30.9

-28.6

33.2

155.2

10.0

37.8

2013E

23.1

-25.4

25.6

170.1

7.0

35.4

2014E

19.4

-15.9

22.4

179.1

9.0

54.1

2015E

19.1

-1.9

22.5

187.6

9.0

55.1

11.4

10.6

7.2

1.0

2.3

2.8

8.4

7.5

5.7

0.8

1.1

3.6

9.9

8.6

5.5

0.7

1.1

4.7

10.1

8.6

6.0

0.7

1.0

4.7

31.7

15.7

37.7

17.7

21.6

13.1

14.2

11.1

9.8

10.4

10.0

235

1.8

238

2.1

332

1.4

380

1.2

360

1.2

360

1.4

1.1

1.4

1.6

1.7

1.8

1.9

Cash Flow Statement

Y/E March

PBT bef. EO Items

Add : Depreciation

Interest

Less : Direct taxes paid

(Inc)/Dec in WC

CF from Operations

CF from Op. Incl. EO Items

(Inc)/dec in FA

CF from Investments

(Inc)/Dec in Net Worth

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

2010

3,051

103

538

233

180

3,639

-629

-1

985

538

590

-144

2,866

6,152

9,017

2011

4,707

172

605

-6,997

-1,564

-1,456

689

5,195

605

842

4,437

1,417

9,019

10,436

2012

3,264

161

1,354

137

-6,855

-2,213

-1,454

661

4,198

1,354

842

2,662

-1,005

10,408

9,407

2013E

2,484

176

1,769

820

-4,324

-715

114

3,515

1,769

590

1,157

556

9,407

9,959

(INR Million)

2014E

2,176

210

1,873

775

1,783

5,267

-566

2,098

1,873

758

-533

4,168

9,958

14,126

2015E

2,083

245

2,060

708

-3,235

444

-566

2,308

2,060

758

-510

-632

14,126

13,494

April 2013

April 2013

Update | Sector: Capital Goods

BHEL

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR182

TP: INR200

Neutral

Adverse industry structure alters 'profit pool'

Poor operating leverage impacts cost absorption and NWC

Bloomberg

Equity Shares (m)

M.Cap. (INR b)/(USD b)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

BHEL IN

2,447.6

445.5/8.4

274/175

-9/-28/-38



Financials & Valuation (INR b)

Y/E March

2013E 2014E 2015E

Net Sales

482.2 431.2 369.7

EBITDA

84.6 68.6 46.7

Adj PAT

58.8 45.2 32.4

EPS (INR)

24.0 18.5 13.3

EPS Gr. (%)

(14.6) (23.2) (28.2)

BV/Sh. (INR) 119.8 131.8 140.4

RoE (%)

21.5 14.7

9.7

RoCE (%)

23.0 15.6 10.4

Payout (%)

28.0 30.0 30.0

Valuation

P/E (x)

7.6

9.9 13.7

P/BV (x)

1.5

1.4

1.3

EV/EBITDA (x)

4.7

5.4

6.5

Div Yield (%)

3.7

3.0

2.2



The power generation market (75% of revenues) is witnessing severe pricing pressure,

intense competition and meaningful demand correction. The Indian BTG segment

currently has a manufacturing capacity of 30-35GW, while the base case order intake

is likely to improve to 15-20GW per year. The Power sector continues to be plagued

by several contentious issues, including fuel shortage, environmental clearance and

land acquisition. While the government has attempted to address several of these

issues, a lot still needs to be done.

Post the hiatus of 18-20 months, the bid/tender pipeline currently stands at 15-

18GW and would be awarded over the next 18 months. Several of these capacities

are from the state sector, and we believe that the initial round of bidding could be a

winner's curse, given the intense competition and also the need to dilute RoE

parameters.

The Industry business has failed to provide support, given the dependence on captive

power (50%+ of revenues). YTD order intake in Industrial segment has been just

INR31b, which corresponds to revenue booking of INR62b. We expect the Industrial

business to witness meaningful slowdown in revenues during FY14.

Large captive power projects (100MW+) are yet to show signs of pick-up. The

Transportation sector has started to show traction, particularly Railways, given the

improved finances. BHEL has also submitted bids for the Metro Rail segment, including

DMRC (tied up with Hitachi). This could be an interesting growth opportunity.

Given the poor cost absorption, we expect staff cost to increase from 12.3% of

revenues in FY13 to 14.4% in FY14 / 17% in FY15. This would lead to a meaningful

decline in EBITDA margin to 12.4% in FY15 from 17.4% in FY13. NWC, which has

deteriorated from negative 19 days in FY09, is likely to stabilize at 140 days.

Maintain Neutral, with a price target of INR200.

BHEL has the most concentrated portfolio, largely exposed to power generation sector; orders likely to remain under pressure

Revenue composition

Segmental Revenue

Source: Company, MOSL

April 2013

BHEL

Order book declines significantly, led by…

…sharp decline in order intake (INR B)



Order book stands at INR1.13t, with BTB of 2.2x TTM, the



Bidding pipeline is showing initial signs of improvement,

lowest in four years, and is impacting revenues.

largely driven by central and state government projects.

Private sector participation remains muted.

Industrial business has failed to provide support

Revenues (INR b)

Order intake (INR b)

Execution has been impacted



YTD order intake in Industrial segment has been just



Revenues have been impacted by execution delays, given

INR31b, which corresponds to revenue booking or INR62b.

We expect the Industrial business to witness meaningful

slowdown in revenues during FY14.

the tight liquidity conditions. BHEL has reduced execution

in instances of delayed payments. This stance of strict

preference for cash flows v/s revenues has started showing

results, with cash collections in FY13 YTD up 18% YoY.

Increased capital intensity, as execution accelerated

while intake declined

NWC deteriorates, largely due to declining order book,

and thus, lower advances



Capital employed has increased, given the capacity expansion to 20GW and increased NWC. This is largely a part of the business

cycle, as lower intake has impacted customer advances. There is also a need to support vendors in a constrained environment.

April 2013

BHEL

Operational Matrix

FY06

Order Intake (INR m)

Order intake

Order intake (MW)

Average Realisation (INR m/MW)

R&M order intake

Power Segment

Industry

International

Cancellations

Total order intake

Order intake Growth (%)

Power Segment

Industry

International Business

Segmental Revenues (INR b)

Power Group

Industry Group

International Group

Revenues

Revenue Growth (%)

Power Group

Industry Group

International Group

Total

Staff Cost (% of Sales)

EBITDA Margins (%)

3,354

109

189

FY07

245

9,724

277

356

FY08

387

14,556

411

503

FY09

444

17,020

472

597

FY10

401

16,489

420

135

590

FY11

443

15,071

465

114

605

FY12

198

3,120

220

243

FY13E

198

7,320

218

276

FY14E

162

6,000

182

273

FY15E

184

6,810

208

319

-19.4

14.8

424.8

155.2

27.1

-43.2

48.1

14.6

21.5

14.8

34.2

41.3

-11.0

45.9

9.3

10.7

-15.4

4.7

-52.6

-31.2

-93.7

-1.2

-40.0

370.1

-16.4

40.0

127.3

14.3

30.0

0.0

97.9

36.9

10.4

145.3

126.9

49.8

10.7

187.4

159.2

43.5

11.3

214.0

213.4

55.6

11.9

280.3

268.6

57.3

15.7

341.5

347.9

89.5

12.2

449.6

378.6

101.6

14.8

495.1

366.4

111.8

15.6

493.7

350.3

72.7

17.1

440.1

269.4

87.2

18.8

375.5

50.5

21.9

29.9

40.5

13.7

18.9

29.5

34.9

3.2

29.0

13.9

20.4

25.5

-12.7

5.7

14.2

15.8

18.9

34.1

27.8

4.8

31.0

15.4

15.7

25.8

3.0

32.0

21.8

15.7

17.7

29.5

56.3

-22.2

31.6

13.5

19.9

8.8

13.5

21.7

10.1

11.4

20.3

-3.2

10.0

5.0

-0.3

-4.4

-35.0

10.0

-10.9

-23.1

20.0

10.0

-14.7

12.2

14.2

16.8

17.6

15.9

12.6

Source: Company, MOSL

April 2013

BHEL

Financials and Valuation

Income Statement

Y/E March

Total Income

Change (%)

Staff Cost

Mfg. Expenses

Selling Expenses

EBITDA

Change (%)

% of Net Sales

Depreciation

Interest

Other Income

Extra-ord. Items (net)

PBT

Tax

Rate (%)

Reported PAT

Adjusted PAT

Change (%)

2010

333,545

25.4

52,432

198,857

23,059

59,196

40.3

17.7

4,580

335

11,549

65,903

22,800

34.6

43,103

46,839

31.3

2011

404,443

21.0

54,769

230,816

38,325

80,532

36.0

19.9

5,441

547

10,206

5,305

90,055

29,945

33.3

60,110

56,650

20.9

2012

479,788

18.8

54,658

280,845

45,213

99,072

23.0

20.6

8,000

513

12,656

-193

103,022

32,623

31.7

70,399

68,918

21.7

2013E

478,803

-0.3

58,968

281,913

54,393

83,528

-15.7

17.4

8,728

1,009

10,383

84,174

26,094

31.0

58,080

-15.7

2014E

426,957

-11.1

61,298

250,133

48,194

67,332

-19.4

15.8

9,777

1,025

9,114

65,643

21,318

32.5

44,325

-23.7

(INR Million)

2015E

365,448

-14.8

62,120

213,774

44,140

45,415

-32.6

12.4

10,826

1,179

12,358

45,768

14,188

31.0

31,580

-28.8

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Differed Tax Liability

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Other Current Assets

Curr. Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Appli. of Funds

E: MOSL Estimates

2010

4,895

154,278

159,174

1,278

-15,272

145,179

65,801

41,647

24,154

15,296

798

429,348

92,355

206,888

97,901

28,137

4,069

324,417

75,798

204,439

44,180

104,931

145,179

2011

4,895

196,643

201,538

1,021

-21,636

180,924

80,497

46,488

34,009

17,338

4,392

515,229

108,521

274,656

96,302

32,654

3,096

389,431

84,366

229,100

75,965

125,798

181,536

2012

4,895

248,837

253,732

1,234

-15,462

239,504

97,066

54,098

42,968

13,476

4,617

591,237

134,445

358,448

66,720

30,118

1,506

412,794

107,781

228,599

76,414

178,443

239,504

2013E

4,895

287,890

292,785

1,234

-15,462

278,557

108,856

63,363

45,493

10,000

4,617

587,577

136,485

376,137

45,624

27,826

1,506

369,130

84,960

204,328

79,843

218,447

278,557

2014E

4,895

316,657

321,552

1,234

-15,462

307,324

120,646

73,139

47,507

5,000

4,617

568,170

125,485

341,828

73,619

25,731

1,506

317,969

68,530

169,107

80,332

250,201

307,324

(INR Million)

2015E

4,895

337,152

342,048

1,234

-15,462

327,819

132,436

83,965

48,471

5,000

4,617

557,636

106,887

285,816

140,175

23,252

1,506

287,904

61,497

147,746

78,662

269,732

327,819

April 2013

BHEL

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Change (%)

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Return Ratio (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

32.5

36.5

221

103

13.6

-0.8

31.4

35.0

241

100

11.7

-0.6

2010

19.1

31.3

21.0

65.0

4.7

26.5

2011

23.1

20.9

25.4

82.3

6.2

25.4

2012

28.2

21.7

31.4

103.7

6.4

22.3

11.5

10.3

7.3

1.5

3.1

3.5

30.3

33.0

264

104

11.0

-0.5

2013E

23.7

-15.7

27.3

119.6

6.6

28.0

7.6

6.6

4.7

0.8

1.5

3.7

21.3

22.7

280

106

10.3

-0.3

2014E

18.1

-23.7

22.1

131.4

5.4

30.0

9.9

8.1

5.4

0.9

1.4

3.0

14.4

15.4

286

110

8.8

-0.2

2015E

12.9

-28.8

17.3

139.7

3.9

30.0

13.7

10.3

6.5

0.8

1.3

2.2

9.5

10.2

281

110

7.4

-0.2

Cash Flow Statement

Y/E March

PBT bef. EO Items

Add : Depreciation

Interest

Less : Direct taxes paid

(Inc)/Dec in WC

CF from Operations

EO Income

CF from Op. Incl. EO Items

(Inc)/dec in FA

(Pur)/Sale of Investments

CF from Investments

(Inc)/Dec in Networth

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

2009

65,830

4,580

335

22,800

-54,151

21,345

21,418

-17,756

-275

-18,031

3,135

-216

335

11,216

-8,632

-5,245

103,147

97,902

2010

84,750

5,441

547

29,945

-37,208

35,586

5,305

40,891

-17,339

-3,593

-20,932

-6,369

-256

547

14,999

-22,171

-2,211

97,901

95,689

2011

103,214

8,000

513

32,623

-78,379

-3,368

-193

-3,560

-13,097

-225

-13,322

6,178

213

513

17,965

-12,087

-28,969

96,302

67,332

2012

84,174

8,728

1,009

26,094

-30,251

7,593

-7,778

1,009

19,903

-20,912

-21,096

66,720

45,623

2013E

65,643

9,777

1,025

21,318

26,992

52,851

(INR Million)

2014E

45,768

10,826

1,179

14,188

65,704

92,521

-11,790

1,179

12,996

-14,175

66,556

73,619

140,175

52,851

-6,790

1,025

17,041

-18,066

27,995

45,624

73,619

April 2013

April 2013

Update | Sector: Capital Goods

Crompton Greaves

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR94

TP: INR150

Buy

Multiple strategies to emerge as a global corporation

Performance of standalone business should stabilize

Standalone business showing signs of stabilization; provides downside support



Power Products: Revenue growth has improved to 4-5% and we see initial signs of

improvement in the demand environment, particularly in the EHV / UHV segments.

Switchgears contribute 25% and exports contribute 31% of Power Product revenues,

and should witness improved demand. Margins have corrected to 9-10% from peak

levels of 18-19%, but are stabilizing.



Industrial Products: Revenue growth has been impacted, given headwinds to the

investment climate. CRG is the market leader in LT motors (market share of 28%) and

the business could show signs of cyclical recovery, given exposure to base industries /

replacement demand. The decline in HT motors (30% of Industrial Product revenues)

could be offset by higher exports (6-7% of revenues), traction motors and increased

contribution of drives (from FY14). Margins, however, are showing strong resilience at

14-15%, though down from peak levels of 22%.



Consumer Products: Revenue growth has bounced back to ~20% and CRG is attempting

to rejuvenate the portfolio (particularly in fans and lighting), improve channel

management, correct the manufacturing strategy, etc. Margins have declined to 10%

from peak levels of 14.5%, impacted by higher ad expenses, currency movement, etc.



Turnaround in overseas operations to be key stock price driver: Restructuring in Belgium

has been completed in December 2012, with 199 employees leaving. Hungarian facilities

are running at full capacity; whether all products are cleared by customers is a key

monitorable. Stabilization should take two quarters (till 1QFY14). Also, detanking rates

in Belgium have remained at 22.5% in 3QFY13, which CRG intends to reduce to 15% in

January 2013 and to 10% in March 2013. We believe stock performance would largely

be driven by an improvement in overseas business, though standalone performance

would offer downside protection. Maintain Buy, with a target price of INR150.

Bloomberg

CRG IN

Equity Shares (m)

641.5

M.Cap. (INR b)/(USD b) 60.3/1.1

52-Week Range (INR)

149/88

1,6,12 Rel. Perf. (%)

0/-25/-40

Valuation summary (INR b)

Y/E March

2013E 2014E 2015E

Net Sales

122.2 129.0 145.9

EBITDA

4.3

9.0 12.9

Adj PAT

1.8

5.0

8.0

EPS(INR)

2.8

7.9 12.5

EPS Gr. (%)

(51.8) 186.3 58.8

BV/Sh. (INR)

57.3 62.2 71.3

RoE (%)

(1.4) 13.0 18.6

RoCE (%)

2.8 10.2 14.6

Payout (%)

25.0 25.0 25.0

Valuation

P/E (x)

34.1 11.9

7.5

P/BV (x)

1.6

1.5

1.3

EV/EBITDA (x) 16.5

7.6

5.1

Div Yield (%)

1.6

1.8

2.2

*Consolidated

CRG is likely to benefit from high exposure to power products, exports and motors, as well as drives

April 2013

Crompton Greaves

Standalone operations to witness improving demand

environment (Revenue growth, % YoY, ttm)

Margins stabilizing (EBIT, %, ttm)



Demand environment should improve in segments like



EBIT margins have corrected from peak levels of 16% in FY11

Power Products (switchgear / UHV), Industrial Products (LT

motors) and Consumer Products.

to 8.8%. Margins are showing signs of stabilization in most

segments.

Exports have improved in FY13 (INR m)

FY08

Asia

Africa

North America

South America

Europe

Australia

Total

4,000

676

926

999

762

281

7,644

FY09

4,488

2,429

700

2,139

845

297

10,900

FY10

5,122

2,070

316

2,233

642

10,437

FY11

3,567

2,726

297

1,978

505

9,128

FY12

3,103

2,146

422

1,702

391

7,820

% YoY

(13.0)

(21.3)

42.0

(14.0)

(22.6)

2.8

(14.3)

Positioning in exports

Peru

Columbia

Nigeria

Ghana

Zambia

Zimbabwe

Malaysia

Number 1

entered in FY12

60% mkt share



From peak levels of INR10b, exports declined to INR7.8b in FY12. With prices



CRG has a dominant position in several

stabilizing, INR depreciating and increased contribution of industrial

motors, we expect exports to increase in FY13.

African markets.

Order intake up meaningfully, driven by projects business

/Hungary (INR b)

Hungary facility had received various PQs in FY12/FY13 (as at

October 2012)

PQs Obtained as at 2012 Ongoing

Edf Hydro, France

Saudi Generation

Western Power, UK

Air Products, UK

SNCF France Railways

Borsodchem, Hungary

Terra Enel, Italy

E.ON, UK

Soles Gas, Algeria

E.ON, Hungary

Helia, Belgium

E.ON, Germany

NGT, UK

RWE, Hungary

Russia Gen

RWE, Germany

Saudi T&D

Andritz Hydro, Ger



Hungary had obtained important pre-qualifications over

the past 18 months, and successful implementation of the

strategy will enable meaningful cost arbitrage.



CRG's order intake in overseas business had improved

meaningfully given increased focus on projects business

and PQs from Hungary. The attempt is not to focus on

execution and the recent decline is due to reduced focus

on projects.

April 2013

Crompton Greaves

Operational Matrix

INR m

Revenues

Power Systems - Standalone

Power Systems - CG Global

Consumer Products

Industrial Systems

Others

Total Sales

Less inter segment sales

Total Consolidated

Growth %

CG Global Revenues

CG Global (Euro m)

Growth %

Exchange Rate (Rs/Euro)

Revenues (growth, % YoY)

Power Systems - Standalone

Power Systems - CG Global

Consumer Products

Industrial Systems

EBIT Margins (%)

Power Systems - Standalone

Power Systems - CG Global

Consumer Products

Industrial Systems

Unallocable exp

FY07

17,829

23,322

9,940

8,874

220

60,186

-264

59,922

38.1

FY08

18,057

30,062

11,178

9,185

598

69,080

-260

68,819

0.0

FY09

22,244

41,280

13,219

10,552

404

87,699

-312

87,387

27.0

FY10

25,103

38,569

16,120

11,744

250

91,785

-376

91,409

4.6

FY11

25,542

40,536

20,212

14,066

171

100,528

-477

100,051

9.5

FY12

28,675

47,632

21,336

15,201

112,942

-456

112,486

12.4

FY13E

28,388

49,761

25,710

15,049

3,750

122,658

-502

122,156

8.6

FY14E

29,240

50,912

29,824

15,801

3,750

129,527

-552

128,975

5.6

FY15E

30,994

58,368

35,192

18,171

3,750

146,476

-607

145,868

13.1

402.8

35.6

57.9

473.9

17.7

57.5

630.0

32.9

65.5

571.4

-9.3

67.5

673.4

17.8

60.2

722.8

7.3

65.9

712.9

-1.4

69.8

759.9

6.6

67.0

871.2

14.6

67.0

46.5

45.7

21.7

29.4

1.3

28.9

12.5

3.5

23.2

37.3

18.3

14.9

12.9

-6.6

21.9

11.3

1.8

5.1

25.4

19.8

12.3

17.5

5.6

8.1

-1.0

4.5

20.5

-1.0

3.0

2.3

16.0

5.0

6.0

14.6

18.0

15.0

10.5

6.4

9.6

14.7

1.1

14.3

5.5

10.8

21.2

0.7

15.7

6.9

11.1

19.3

0.7

18.4

9.3

14.3

22.1

0.7

18.0

8.2

14.5

18.7

0.9

10.8

-1.8

12.3

14.8

1.1

9.1

9.0

-6.1

1.3

11.3

11.5

14.8

15.0

1.2

Source: Company,

9.3

5.5

12.0

16.0

1.2

MOSL

April 2013

Crompton Greaves

Financials and Valuation

Income statement

Y/E March

Net Sales

Change (%)

Raw Materials

Staff Cost

Other Mfg. Expenses

EBITDA

% of Net Sales

Depreciation

Interest

Other Income

EO Items (as rep.)

PBT

Tax

Rate (%)

Reported PAT

Extra-ordinary Inc.(net)

Adjusted PAT

Minority Int

Consolidated PAT

Change (%)

2010

91,409

4.6

57,966

11,131

9,542

12,770

14.0

1,551

428

1,100

352

12,243

3,650

29.8

8,593

352

8,241

6.0

8,247

47.3

2011

100,051

9.5

64,980

11,811

9,822

13,438

13.4

1,936

352

1,142

-381

11,910

3,100

26.0

8,810

-381

9,191

76.5

9,268

12.4

2012

112,486

12.4

76,850

14,662

12,937

8,036

7.1

2,603

463

524

5,494

1,821

33.1

3,673

60.0

3,733

-59.7

2013E

122,156

8.6

82,625

17,729

17,463

4,340

3.6

2,232

764

937

-2,288

1,074

1,592

148.3

-518

-2,288

1,770

69.8

1,840

-50.7

2014E

128,975

5.6

84,801

17,520

17,633

9,020

7.0

2,374

746

814

6,715

1,714

25.5

5,000

67.0

5,067

175.5

2015E

145,868

13.1

90,976

17,881

24,144

12,868

8.8

2,570

728

996

10,566

2,584

24.5

7,982

67.0

8,049

58.8

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Loans

Deffered Tax Liability

Minority Interest

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Current Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

April 2013

2010

1,283

23,760

25,043

5,010

30,145

29,858

17,234

12,623

1,137

5,536

41,018

10,412

21,463

6,688

2,455

30,170

16,098

10,469

3,603

10,849

30,145

2011

1,283

31,464

32,747

3,955

160

157

37,019

37,805

19,490

18,315

1,102

6,747

45,646

11,893

25,427

2,984

5,342

34,786

18,585

12,148

4,054

10,860

37,024

2012

1,283

34,826

36,109

9,849

-122

157

45,992

44,477

23,005

21,473

1,097

7,864

55,343

12,233

31,432

4,976

6,703

40,181

21,076

15,318

3,787

15,162

45,992

2013E

1,283

35,501

36,784

16,998

-569

157

53,370

58,699

25,876

32,823

422

6,000

56,680

16,310

31,764

2,487

6,119

42,554

22,495

16,218

3,841

14,126

53,370

(INR Million)

2014E

1,283

38,597

39,880

16,317

-529

157

55,825

61,047

27,544

33,504

409

7,778

57,306

14,325

32,657

4,285

6,038

43,171

22,008

17,269

3,893

14,135

55,825

2015E

1,283

44,473

45,756

15,653

-529

157

61,037

64,887

30,114

34,774

409

11,010

64,454

16,318

37,082

4,309

6,744

49,609

25,041

20,271

4,296

14,845

61,037

Crompton Greaves

Financials and Valuation

Ratios

Y/E March

Basic (INR)

Consolidated EPS

Growth (%)

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E (standalone)

P/E (consolidated)

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Leverage Ratio

Debt/Equity (x)

2010

9.0

12.8

46.5

15.3

39.0

1.3

15.3

2011

10.8

14.3

11.5

17.3

51.0

2.2

23.7

2012

7.9

5.7

-60.0

9.8

56.3

1.4

20.7

2013E

7.3

2.8

-51.8

6.2

57.3

1.5

25.0

2014E

8.0

7.9

186.3

11.5

62.2

1.7

25.0

2015E

9.6

12.5

58.8

16.4

71.3

2.1

25.0

21.7

16.4

18.4

13.6

1.0

3.0

1.5

13.0

34.1

11.1

16.5

0.6

1.6

11.8

11.9

10.0

7.6

0.5

1.5

1.8

9.8

7.5

8.3

5.1

0.4

1.3

2.2

39.6

30.9

30.5

28.1

10.7

9.6

-1.4

2.8

13.0

10.2

18.6

14.6

-0.1

0.0

0.3

0.2

0.1

Cash Flow Statement

Y/E March

PBT before EO Items

Add : Depreciation

Interest

Less : Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

EO Income

CF from Oper. incl. EO Items

(Inc)/Dec in FA

(Pur)/Sale of Investments

CF from Investments

(Inc)/Dec in Net Worth

(Inc)/Dec in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

April 2013

2010

11,891

1,551

428

3,650

-125

10,094

352

10,446

-1,526

-3,864

-5,389

-481

-2,173

428

944

-4,025

1,032

5,656

6,688

2011

12,291

1,936

352

3,100

-3,715

7,765

-381

7,384

-7,593

-1,211

-8,805

763

-1,055

352

1,644

-2,288

-3,709

6,688

2,984

2012

5,494

2,603

463

2,494

-2,311

3,756

-5,756

-1,117

-6,873

722

5,894

463

1,044

5,109

1,992

2,984

5,117

2013E

2,281

2,232

764

1,648

-1,453

2,176

-1,207

969

-12,907

1,864

-11,043

2,356

7,150

764

1,163

7,579

-2,494

4,976

2,487

(INR Million)

2014E

6,715

2,374

746

1,674

1,789

9,950

-3,042

-1,778

-4,820

-625

-681

746

1,279

-3,331

1,798

2,487

4,285

2015E

10,566

2,570

728

2,584

-686

10,594

-3,840

-3,232

-7,072

-565

-664

728

1,542

-3,498

4,285

4,309

April 2013

Update | Sector: Capital Goods

Siemens

BSE SENSEX

S&P CNX

18,865

5,704

CMP: INR530

TP: INR537

Neutral

Impressive portfolio; exposed to several economic trends

Manufacturing footprint correction, higher product exports key margin drivers

Bloomberg

Equity Shares (m)

M.Cap. (INR b)/(USD b)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

SIEM IN

337.0

178.6/3.4

839/482

7/-26/-38



Financials & Valuation (INR b)

Y/E Sep

2013E 2014E 2015E

138.4

13.3

7.7

21.8

49.9

130.8

17.4

19.1

49.7

24.3

4.1

12.1

1.7

160.7

16.1

9.5

27.0

23.9

144.4

19.6

21.4

49.7

19.6

3.7

10.1

2.2



Net Sales

125.3

EBITDA

9.7

Adj PAT

5.1

Adj EPS (INR) 14.5

EPS Gr (%)

-1.6

BV/Sh. (INR) 119.9

RoE (%)

12.5

RoCE (%)

14.0

Payout (%)

49.7

Valuation

P/E (x)

36.4

P/BV (x)

4.4

EV/EBITDA (x) 16.9

Div. Yield (%)

1.2



SIEM has one of the most diversified product portfolios amongst its peers and is

exposed to multiple industries and economic trends. Hence, it will be one of the key

beneficiaries of any economic revival. The share of products in its revenue mix had

declined from peak levels of 71-72% in FY02 to ~33% in FY09 (given increased

contribution of projects, particularly from Qatar), and currently stands at ~41%.

Industry accounts for ~40% of sales while the remaining 60% is derived from Healthcare

(8%), Transportation (6%), Power Distribution (~10%), Power Transmission (25-28%)

and Building Technology (~8%).

SIEM’s exports have been largely supported by mega orders driven by T&D network

expansion by Qatar General Electricity and Water Corporation (Kahrama). Post

Kahrama, SIEM has not witnessed any meaningful ramp up in export orders (barring

few mid-size orders from Bangladesh). A large part of the Kahrama network expansion

is completed. Also, product exports from India at INR3.3b are small. We believe that

correcting the net forex exposure is important to manage margin volatility.

Despite significant increase in local manufacturing, the import content in SIEM’s

business has not declined meaningfully. RM cost stands at 76% of revenues (highest

amongst peers), and imports account for 53% of the RM cost (~75% of imports are

from parent company). We believe that correcting the manufacturing footprint is

important for structural improvement in margins.

SIEM is building on its SMART product initiative to reduce costs (through complete

localization including the vendor base) and develop products suitable for emerging

markets. The company is establishing six new hubs in India for SMART products. 30

SMART products have already been introduced, while 30 products are in the pipeline;

order intake contribution from SMART products has increased from 5% in FY10 to

15% in FY12. SIEM targets revenues of EUR1b from SMART products by 2020. SMART

products are an important part of SIEM’s strategy to correct the manufacturing

footprint and increase exports.

Maintain Neutral, with a price target of INR537 (22x FY14/15E average earnings).

Business overview - exposed to several segments in the economy (FY11)

Product segment

Building Tech

Revenue

INR m

Share (%)

9,469

Remarks

Range of products / services: security, automation, operations, etc

Incl electrical installation technology, heating & ventilation systems,

security & fire safety systems

Diverse product range incl signaling & control systems

Traction systems, bogies and onboard power supplies

Railway control and communication solutions, etc

LV/MV Switchgears, Switchboards, Substations, Transformers, etc

Motors, Drives, Compressors, Powergen / distribution solutions, etc

HV Switchgear, Transformers, Substations

Motors, Gearboxes, Drives, etc

Industrial Automation Products

Blast Furnaces, Turnkey Automation, for industries like Metals / Mining,

Pulp and Paper, Cement, Airports, Water Technologies etc

X-rays, Digonostic equipments, Scanning Equipments etc

Mobility

7,530

Power Distribution

Oil & Gas

Power Transmission

Industrial Drives

Industrial Automation

Industrial Solutions

Healthcare

April 2013

11,549

14,208

34,009

15,930

8,691

11,592

10,609

10%

12%

28%

13%

10%

Siemens

Domestic business has witnessed steady growth trajectory



SIEM’s domestic sales have shown robust performance over the last decade (except FY08, when large projects were very few),

backed by steady growth in base business and robust intake of mega projects. Given the constrained environment, the

product business has begun showing signs of tapering growth, while the project business has witnessed margin erosion.

Growth in domestic sales has remained steady

Products constitute 45% of domestic sales

Product sales posted 19% CAGR over FY03-12

Project sales grew at 33% CAGR over 10 years

Base business highly correlated with macro economy



Typically, base orders are largely fed by recurring/steady demand from industry, driven by replacement demand, maintenance

capex and small scale greenfield expansion projects. Mega projects are more volatile in nature and depend on award of

large ticket orders in the economy. Except for a brief decline in FY09 (impacted by the credit crisis), SIEM’s base orders have

remained steady over FY05-11. Order inflow in the base business is strongly correlated (a correlation of 99.5%) with gross

capital formation.

Except FY09, base orders have remained steady

Base orders are directly correlated with gross fixed capital

formation (99.5%)

April 2013

Siemens

Exports impacted, skewed towards projects

Exports contribute 14% of

SIEM’s sales, the lowest

amongst peers. Also, the

share of product exports

at just INR3.3b is very

small.

Exponential growth driven

by execution of Qatar orders

SIEM targets revenues of

EUR1b from SMART products

by 2020. SMART products are

an important part of SIEM’s

strategy to correct the

manufacturing footprint and

increase exports. The company

has made significant

investments in its SMART

product development initiative

and is establishing six hubs in

India, including “Center of

Competence”.

Focusing on SMART strategy to ramp up exports / correct manufacturing footprint

Centralised across clusters

PLM

(Product Life Management)

India is the chosen destination

for PLM for South East Asia

Cluster

Decentralised

CRM (Customer Relationship

Management)

SCM

(Supply Chain Management)

Expanding local presence critical to structurally improve profitability



Over the last five years, SIEM has adopted a dual approach of organic and inorganic expansion. In the last five years, SIEM

has doubled its manufacturing base and currently has 22 factories, up from just seven factories in FY05.

Major Greenfield expansion over last 7 years (INR b)

Year

Traction motors factory in Kalwa

Power Transformer factory in Kalwa

GIS factory (upto 45MW)

Commissioning of GIS factory in

Aurangabad HV switchgear factory

Commissioning of Instrument

Transformer factory in Aurangabad

Rail Coaches factory in Aurangabad

Medium voltage/Relays and Systems

factory, Goa

(upto 150MW) and production of compressors

Capex on Wind Turbine factory in Varodara

Total

Source:

FY06

FY07

FY09

FY10

FY12

INR b

1.0

2.0

0.3

0.4

0.3

2.0

Significantly ramped up capex beginning FY05

2.0

2.8

1.3

12.0

Company, MOSL

April 2013

Siemens

Operational Matrix

FY06

Order intake (INR m)

Opening Orders

Orders-Intake

Turnover

Closing Order-book

Order-intake Growth %

Order-book Growth %

Execution Rate %

Book-to-Bill (TTM)

Revenues (INR m)

Energy

Industry

Infa & Cities

Healthcare

Others

Intersegment

Total

Growth % YoY

Energy

Industry

Infa & Cities

Healthcare

Others

Total

EBIT %

Energy

Industry

Infa & Cities

Healthcare

Others

Total

35,081

82,025

45,103

75,258

98.9

1.1

38.5

1.7

FY07

75,258

101,357

77,268

94,074

23.6

0.3

43.7

1.2

FY08

94,074

87,182

82,955

98,338

-14.0

0.0

45.8

1.2

FY09

98,338

87,960

83,887

102,292

0.9

0.0

45.0

1.2

FY10

102,292

124,305

93,152

135,839

41.3

0.3

41.1

1.5

FY11

135,839

122,886

118,184

139,213

-1.1

0.0

45.7

1.2

FY12

139,213

102,351

127,081

136,600

-16.7

0.0

52.6

1.1

FY13E

136,600

110,539

123,652

123,487

8.0

-0.1

50.0

1.0

FY14E

123,487

127,120

136,607

114,001

15.0

-0.1

54.5

0.8

FY15E

114,001

158,900

158,806

114,094

25.0

0.0

58.2

0.7

19,782

17,531

3,239

4,138

3,080

-2,666

45,104

43,008

26,084

4,487

5,247

3,169

-4,727

77,268

34,829

31,451

15,773

6,053

876

-6,028

82,955

34,578

28,609

24,145

5,431

653

-9,528

83,888

37,564

32,439

25,509

7,537

536

-10,432

93,152

53,367

35,503

28,517

10,609

1,104

-8,810

120,290

52,529

42,682

31,141

10,815

618

-8,586

129,199

49,903

41,402

32,075

12,113

649

-10,839

125,302

54,893

45,542

35,283

13,930

681

-11,972

138,357

63,127

52,373

41,634

16,716

715

-13,908

160,656

104.5

49.7

42.4

12.4

102.6

64.1

117.4

48.8

38.5

26.8

2.9

71.3

-19.0

20.6

251.5

15.4

-72.4

7.4

-0.7

-9.0

53.1

-10.3

-25.4

1.1

8.6

13.4

5.6

38.8

-17.9

11.0

42.1

9.4

11.8

40.8

106.0

29.1

-1.6

20.2

9.2

1.9

-44.0

7.4

-5.0

-3.0

3.0

12.0

0.0

-3.0

10.0

15.0

0.0

10.4

15.0

18.0

20.0

0.0

16.1

6.2

9.3

7.6

2.4

11.4

7.9

9.0

8.1

7.1

2.2

11.1

8.8

6.1

10.3

5.3

5.5

39.2

8.3

15.2

8.0

3.2

7.6

76.3

11.0

17.4

8.7

6.3

6.9

30.9

12.5

12.1

6.3

8.0

4.8

0.0

9.8

6.4

3.8

5.3

0.6

0.0

5.3

6.0

5.0

4.0

6.0

0.0

6.0

Source:

7.5

6.0

6.5

0.0

7.9

Company,

8.0

7.0

6.5

0.0

8.5

MOSL

April 2013

Siemens

Financials and Valuation

Income Statement

Y/E September

Total Revenues

Change (%)

Raw Materials

Staff Cost

SGA Expenses

EBITDA

Change (%)

% of Total Rev.

Depreciation

Interest

Other Income

EO Items (net)

PBT

Tax

Rate (%)

PAT

Adjusted PAT

Change (%)

2010

93,733

11.2

68,463

6,325

6,280

12,666

13.5

1,016

106

1,043

12,587

4,315

34.3

8,272

26.5

2011

120,290

28.3

89,799

9,174

7,964

13,353

11.1

1,522

127

1,048

12,772

4,295

33.6

8,477

8,456

2.2

2012

129,199

7.4

98,478

11,959

9,849

8,913

-33

6.9

2,010

270

575

-1,999

5,209

1,777

34.1

3,432

5,031

-40.5

2013E

125,302

-3.0

91,470

13,678

10,474

9,680

7.7

2,206

250

600

7,824

2,705

34.6

5,119

1.7

2014E

138,357

10.4

99,617

14,609

10,839

13,293

9.6

2,338

250

750

11,455

3,780

33.0

7,675

49.9

(INR Million)

2015E

160,656

16.1

117,279

15,438

11,829

16,110

10.0

2,469

250

800

14,191

4,683

33.0

9,508

23.9

Balance Sheet (Standalone)

Y/E September

Share Capital

Reserves

Net Worth

Loans

Net Deferred Tax Liab

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Curr. Assets

Inventory

Debtors

Cash & Bank Balance

Loans & Advances

Other Current assets

Current Liab. & Prov.

Creditors

Other Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

2010

674

34,103

34,778

-1,313

33,467

13,549

6,209

7,340

2,465

3,885

79,281

6,822

33,023

18,534

12,390

8,512

59,505

29,151

14,704

15,651

19,776

33,467

2011

681

37,481

38,162

-1,889

36,273

19,560

8,269

11,291

2,195

405

85,953

8,078

41,759

12,750

13,708

9,658

63,571

28,280

17,252

18,039

22,382

36,274

2012

704

38,922

39,626

-3,176

36,450

24,401

10,279

14,122

850

410

87,889

9,431

46,897

9,768

11,031

10,762

66,821

32,437

17,232

17,152

21,068

36,451

2013E

704

41,496

42,200

-3,176

39,024

25,951

12,485

13,466

1,000

410

88,832

9,612

46,001

12,278

10,642

10,299

64,685

31,601

16,135

16,949

24,147

39,025

(INR Million)

2014E

704

45,354

46,058

-3,176

42,882

27,501

14,822

12,679

1,000

410

99,291

10,235

50,794

15,140

11,751

11,372

70,498

32,903

18,195

19,400

28,794

42,883

2015E

704

50,134

50,838

-3,176

47,662

29,051

17,292

11,759

1,000

410

110,905

11,884

58,981

13,191

13,645

13,205

76,412

32,957

21,127

22,328

34,493

47,663

April 2013

Siemens

Financials and Valuation

Ratios

Y/E September

Basic (INR)

EPS

Growth (%)

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation (x)

P/E (Standalone)

Cash P/E

EV/EBITDA

EV/Sales

Price/Book Value

Dividend Yield (%)

Profitability Ratios (%)

EBITDA Margin

Net Margin

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors. (Days)

Asset Turnover (x)

Leverage Ratio

Debt/Equity (x)

13.5

8.8

25.9

27.1

129

114

2.8

0.0

11.1

7.0

23.2

24.5

127

3.3

0.0

2010

24.5

26.5

27.6

103.2

5.0

23.8

2011

24.8

1.2

29.3

112.1

6.0

28.1

2012

14.8

(40.5)

20.7

116.4

6.2

48.8

35.8

25.6

18.6

1.3

4.6

0.8

6.9

2.7

12.9

14.3

132

3.5

0.0

2013E

14.5

(1.6)

20.8

119.9

6.2

49.7

36.4

25.5

16.9

1.3

4.4

1.2

7.7

4.1

12.5

14.0

134

3.2

0.0

2014E

21.8

49.9

28.4

130.8

9.3

49.7

24.3

18.6

12.1

1.2

4.1

1.7

9.6

5.5

17.4

19.1

134

3.2

0.0

2015E

27.0

23.9

34.0

144.4

11.5

49.7

19.6

15.6

10.1

1.0

3.7

2.2

10.0

5.9

19.6

21.4

134

3.4

0.0

Cash Flow Statement

Y/E September

PBT before EO Items

Add : Depreciation

Interest

Less: Directtaxespaid

(Inc)/Dec in WC

CF from Operations

EO Income

CF from oper. Incl. EOitems

(Inc)/dec in FA

(Pur)/Sale of Investments

CF from Investments

(Inc)/Dec in Networth

Inc/(Dec) in Debt

Less : Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Bal.

Closing Balance

E: MOSL Estimates

2010

12,587

1,016

106

4,315

2,054

11,448

(3,469)

885

(2,584)

(888)

(3)

106

1,966

(4,778)

4,087

14,449

18,536

2011

12,752

1,522

127

4,295

(8,715)

1,390

1,411

(5,203)

3,480

(1,723)

(3,296)

(2)

127

2,373

(5,473)

(5,785)

18,534

12,749

2012

7,208

2,010

270

1,777

-5,400

2,311

-1,999

312

-3,496

-5

-3,501

-800

270

2,455

207

-2,982

12,750

9,768

2013E

7,824

2,206

250

2,705

(569)

7,006

(1,700)

250

2,545

(2,795)

2,510

9,768

12,278

2014E

11,455

2,338

250

3,780

(1,784)

8,478

(INR Million)

2015E

14,191

2,469

250

4,683

(7,649)

4,579

(1,550)

250

4,728

(4,978)

(1,949)

15,140

13,191

8,478

(1,550)

(0)

250

3,816

(4,066)

2,862

12,278

15,140

April 2013

Disclosures

This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement

to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been

furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates

or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt

or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its

affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or

employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates

or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness

for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision

based on this report or for any necessary explanation of its contents.

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest

Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement

1. Analyst ownership of the stock

2. Group/Directors ownership of the stock

3. Broking relationship with company covered

4. Investment Banking relationship with company covered

Companies where there is interest

None

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or

will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible

for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to

law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.K.

This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial

Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to

which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S.

Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States.

In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state

laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein

are not available to or intended for U.S. persons.

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional

investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major

institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended

(the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into

a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within

the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer,

MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst

account.

For Singapore

Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors

Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore

to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:

Nihar Oza

Kadambari Balachandran

Email: niharoza.sg@motilaloswal.com

Email : kadambari.balachandran@motilaloswal.com

Contact: (+65) 68189232

Contact: (+65) 68189233 / 65249115

Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025

Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com