India Strategy | Get on track please !
Thematic | July 2017
Capital Goods
Diesel Gensets – Firing up
Ankur Sharma
(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449
Amit Shah
(Amit.Shah@MotilalOswal.com); +91 22 3029 5126
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Capital Goods | Diesel Gensets
Contents | Capital Goods: Diesel Gensets – Firing up
Summary .............................................................................................................................. 3
On the road to recovery........................................................................................................ 4
Do lower power deficits imply lower DG demand? ............................................................... 7
So what drives the revival in DG demand over FY18-20? ...................................................... 8
Brand, Distribution, Service, Product range key factors ...................................................... 13
Competitive pressure intensifies ........................................................................................ 19
Diesel Genset industry back on growth track ...................................................................... 23
Key players in the Indian DG set market ............................................................................. 26
What goes into making a DG set? ....................................................................................... 31
Cummins India .................................................................................................................... 32
Financials and Valuations ................................................................................................... 36
Kirloskar Oil Engines ........................................................................................................... 38
18 July 2017
2

Capital Goods | Diesel Gensets
Capital Goods
Diesel Gensets – Firing up
Period of volume decline over; expect 10% CAGR over FY17-20
Diesel Generator (DG) industry to grow at 10% CAGR over FY17-20:
After a
subdued FY13-17, when industry volumes declined at a compounded annual rate of
5% (primarily due to a sharp fall in sales for telecom towers), we expect the industry
to grow at a CAGR of 10% over FY17-20. (Over FY04-08, the industry had grown at a
CAGR of 10%).Growth would be driven by higher volumes in the mid/high horse
power (HP) segment; demand for low HP products is likely to remain subdued. Key
end markets that are seeing a revival are Infrastructure (Roads, Metro Rail,
Railways), Commercial (IT/ITES, Data Centers, Hotels, Hospitals, Educational
Institutions), and Manufacturing (Pharmaceuticals, Automotive). We highlight that
less than 15% of the demand for DG sets is for prime power and 85-90% of the DG
market is for backup power – this implies that despite low power deficits, the need
for DG sets would continue.
Brand, distribution, service network, product portfolio, and reliability key
differentiators:
In our view, pricing alone would not lead to market share gains for
any player in the DG industry. Given that DG sets are primarily used for backup and
typically last for 10 years or longer, the decisive factors go beyond price. Brand
positioning, dealer network/distribution, service centers, product portfolio, and
reliability are some of the key decisive factors. This is all the more important in case
of the MHP (375-750kva) and HHP (>750kva) ranges, where timely availability of
backup power is crucial.
Competitive pressures intensifying – MNCs dominate in HHP (>750kva) category:
MNCs such as Perkins (started local manufacturing recently for >750kva engines),
MTU, Volvo and Indian players like KOEL, Greaves Cotton are striving to increase
presence in the MHP/HHP segments, while Cummins India is trying to take share in
the LHP (<160kva) segment. Cummins is the market leader in the MHP/HHP
segment while Mahindra, KOEL and Ashok Leyland lead in the LHP segment.
Implementation of GST (from July 1, 2017) would reduce the share of unorganized
players, especially in the LHP segment, and would be beneficial to incumbent
organized players.
Valuation and view:
Our preferred play on the Indian DG industry is Cummins India,
the market leader, with the largest pan India distribution/dealer network, wide
service network, access to parent’s technology, wide product portfolio, and a
reputation of reliability. A recovery in exports would strengthen the earnings revival
estimated over the next few years. We upgrade the stock to
Buy,
with a target price
of INR1,110 (30x FY19E EPS of INR37; in line with 5-year average). Other
beneficiaries of a revival in domestic DG demand include Kirloskar Oil Engines (KOEL;
Not Rated) and Greaves Cotton.
Valuation snapshot
FY18
FY19
KKC KOEL KKC KOEL
P/E(x)
32.0 28.2 25.9 21.6
P/B
6.4 3.4 5.8 3.1
EV/EBITDA 28.4 14.2 22.4 11.6
Capital Goods
Diesel Gensets
+91 22 6129 1556
Ankur Sharma
ankur.vsharma@motilaloswal.com
Please click here for Video Link
18 July 2017
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Capital Goods | Diesel Gensets
On the road to recovery
Key end markets witnessing a recovery
For the last five years, DG industry volumes have been subdued. During FY13-17,
volumes declined at 5% CAGR, driven by (a) lower power deficits, as demand for
power declined with macroeconomic slowdown, (b) weak demand from key end
markets – Industrial/Manufacturing, Real Estate and Infrastructure, and (c)
collapse in demand from telecom towers from a peak of 100,000 DG sets in
FY11 to 30,000 units in FY17.
Exhibit 1: DG industry volumes and growth (%)
10% 15% 12%
Diesel Genset volumes
5%
3%
-5%
0%
9%
-11%
-26%
13%
-19%
YoY growth(%)
-1%
10% 10% 10%
Source: MOSL, Industry
Exhibit 2: DG industry sales and growth (%)
17%
5%
-9%
-23%
60,484 70,920 64,345 78,260
56,882 56,364 63,679 71,600 80,433 90,578
DG Industry sales (INRm)
22%
60,438
-6%
YoY (%)
13%
-1%
12%
12%
13%
Source: MOSL, Industry
One of the key reasons for the decline in DG industry volumes has been the
sharp fall in demand from the Telecom sector. From a peak of 100,000 DG sets
in FY11, demand from the telecom sector declined to 30,000 in FY17. Mahindra,
which has 60% share in telecom industry DG sets, was the worst affected. 15-
75kva DG sets are primarily used in telecom towers and constitute 55-60% of
Telecom sector demand. The share of 15-75kva DG sets, which was 78% of
overall DG set sales in FY10, fell to 56% in FY17.
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Capital Goods | Diesel Gensets
Exhibit 3: Industry DG volumes – fall during FY13-17 driven by weak demand from
telecom towers
15-75kva
175,000
140,000
105,000
70,000
35,000
-
75-375kva
375-750kva
750kva and above
Source: MOSL, Industry
Exhibit 4: Weak telecom towers sales lead to decline in industry DG sales
20%
10%
0%
-10%
-20%
-30%
DG Industry sales growth(%) LHS
Telecom tower growth(%) RHS
20%
15%
10%
5%
0%
-5%
Source: MOSL, Industry
Exhibit 5: Key end markets for 15-75kva DG sets – Telecom
accounts for 55-60% of sales
8.9%
4.5%
4.7%
5.8%
9.8%
10.4%
55.9%
Telecom
Hospitality
Commercial complex
Small Restaurants
Small scale Industries
Petrol Station
Others
Source: MOSL, Industry
Exhibit 6: Key end markets for 75-375kva DG sets
3.5%6.7%
25.0%
19.6%
Real Estate
Large Industries
Healthcare
Hospitality
20.9%
24.3%
Infrastructure
Others
Source: MOSL, Industry
Exhibit 7: Key end markets for 375-750kva DG sets –
Manufacturing, Hotels and Hospitality at ~80% of sales
4.0%
15.9%
31.2%
Large Industries
Hospitality
Healthcare
IT/ITES
30.2%
Others
Source: MOSL, Industry
Exhibit 8: Key end markets for >750kva DG sets – 50% of
Cummins India’s sales from this segment
0.8%
9.2%
IT/ITES
Large Industries
33.9%
56.1%
Real Estate
Others
Source: MOSL, Industry
18.7%
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Capital Goods | Diesel Gensets
We expect the industry volume growth to revert to 10% CAGR over FY17-20;
growth would be driven by rising demand in the key end markets of
Infrastructure (Roads, Metro Rail, Railways), Commercial (IT/ITES, Data Centers,
Hotels, Malls, Hospitals, Educational Institutions), and Manufacturing
(Pharmaceuticals, Automotive).
Growth in the DG industry is linked to base power deficit and IIP growth – both
of these are a reflection of the demand for industrial and residential power, and
have been declining over the past five years (see Exhibit 8 and 9). A revival in
economic growth would drive up both manufacturing/IIP growth and power
deficit, in turn resulting in higher demand for DG sets.
Exhibit 9: Cummins India DG sales growth (LHS) versus base
power deficit (RHS)
Cummins DG sales(YoY)
40%
20%
0%
-20%
-40%
Power Deficit(%)
12%
8%
4%
0%
-4%
18%
12%
6%
0%
-6%
Exhibit 10: Cummins India DG sales growth correlated to IIP
/ manufacturing growth
IIP (YoY)
Cummins India sales(YoY)
40%
20%
0%
-20%
-40%
Source: Industry, MOSL
Source: Industry, MOSL
That usage of DG sets to generate power is expensive, is often presented as an
argument against them. While the cost of power produced by renewable
sources has declined to ~INR3/unit and the cost of power produced by using
coal is ~INR4/unit, the cost of power produced by using DG sets is INR15-
17/unit. However, demand for DG sets would continue, given that (a) DG sets
are used primarily for backup power and not prime power, and (b) the power
distribution network is still patchy in India.
Exhibit 11: Cost of power generation from various sources in India (FY17)
Description
Solar
Coal
Hydro
DG set
Wind
(INR/unit)
2.44
3-4
3-4
15-17
3.33
Source: Industry, MOSL
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Capital Goods | Diesel Gensets
Do lower power deficits imply lower DG demand?
Industrial production and capacity building key drivers, in our view
One of the key push backs we have always received from investors is that with a
fall in power deficits, there would also be a fall in the requirement of diesel
gensets.
In our view, genset demand is driven by higher capacity building/capex in the
economy which in turn triggers a demand for backup power. As in developed
economies, India too is witnessing a shift of genset demand to back up power
than standby - ~85-90% of genset usage is currently for back- up power.
To illustrate our point, we cite the example of the diesel genset markets in US
and China (the largest markets for gensets globally). As seen in the chart below,
despite a power surplus situation in both the countries, genset demand
continue to grow and has a high correlation to IIP – higher industrial capex
ideally should lead to higher demand for backup power.
Exhibit 12: Low correlation between US power deficits and
Cummins US power generation sales
Cummins US sales(YoY)
40%
20%
0%
-20%
-40%
Power deficit(%)
-4.0%
-4.5%
-5.0%
-5.5%
-6.0%
Exhibit 13: High correlation between IIP growth and
Cummins Power Generation sales in the US
Cummins US sales growth(%)
40%
20%
0%
-20%
-40%
US IIP growth(%)
10%
5%
0%
-5%
-10%
-15%
Source: MOSL, Industry
Source: MOSL, Industry
Exhibit 14: No significant correlation between China power
deficits and Cummins China power generation sales
75%
50%
25%
0%
-25%
-50%
Cummins China sales(YoY)
Power deficit(%)
0.0%
-0.4%
-0.8%
-1.2%
-1.6%
Exhibit 15: China IIP growth and Cummins Power
Generation sales in China are highly correlated
Cummins China sales(YoY)
80%
60%
40%
20%
0%
-20%
-40%
China IIP growth(%)
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
Source: MOSL, Industry
Source: MOSL, Industry
While reported power deficits in India may have come down, the reliability of
power is still a concern – in turn, gensets are installed as an ‘insurance’ against
power cuts.
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Capital Goods | Diesel Gensets
So what drives the revival in DG demand over FY18-20?
We believe there are multiple drivers for a pick-up in demand for DG sets, going
forward. With >85% of DG sets being used for backup power, low power deficits
do not directly translate into lower demand for DG sets. In our view, the bigger
demand driver for DG sets is industrial, infrastructure and real estate capex. A
revival in these three end markets is critical for a recovery in DG demand.
Infrastructure spending – Roads, Metro Rail, Railways
The current government is focusing on pump priming the economy through
increased infrastructure spending, especially on roads, metro rail and railways.
Roads:
The government intends to order 25,000km of roads in FY18, and also
take road construction to 41km/day from 22km/day in FY17. In FY17, there was
a 40% jump in road construction. During road construction, the need for DG sets
is felt in remote locations, where availability of power is an issue.
Exhibit 16: India road construction orders
Road Orders(kms)
25,000
16,271
10,200
3,800
7,446
2,198 2,114
7,336
10,098
2,205
5,732
4,260
1,900
4,410
1,987
2,628
6,061
Exhibit 17: India roads completed annually
NHAI
Total roads completed
8,231
5,200
5,013
4,500
2,674
2,200
2,800
1,500
Source: Industry, MOSL
Source: Industry, MOSL
Railways:
The Indian Railways is looking at installing/replacing the diesel
generators used to power air conditioners in trains. Each generator car has two
DG sets and the annual industry volumes are 500 units, implying a market size of
INR2b-2.5b. Key participants are Cummins, KOEL, Volvo and Greaves Cotton.
Metro Rail:
Another big opportunity for DG sets over the next few years is in
metro rail projects, with a new metro rail policy on the anvil and every large city
(>1m population; 360 cities) in India looking to construct a metro rail network.
Each metro station would need to have DG sets as backup in case of power
failure. The typical ratings used in a metro station vary from 500kva to 1,000kva.
With 855km of metro rail projects coming up in India over the next few years at
an overall capex of INR3t (see following table), the opportunity in this segment
is immense.
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Capital Goods | Diesel Gensets
Exhibit 18: Upcoming and planned metro rail projects in India
Planned Metro projects
Chennai Metro
Bengaluru Metro
Jaipur Metro
Pune Metro
Kochi Metro
Ludhiana Metro
Chandigarh Metro
Lucknow Metro
Nagpur Metro
Bhopal Metro
Indore Metro
Ahmedadabad Metro (East –West)
Delhi Phase IV
Vishakapatnam Metro
Vijaywada Metro
Thiruvantapuram Metro
Mumbai Metro Dahisar-DN Nagar
Mumbai Metro DN Nagar-BKC-Mankurd
Mumbai Metro Colaba –BKC – SEEPZ
Mumbai Metro Wadala-Ghatpkopar-Thane-Kasarvadali
Mumbai Metro Thane – Bhiwandi – Kalyan(17 stations)
Mumbai Metro Jogeshwari-Vikhroli Link Road (13 stationss)
Mumbai Metro Andheri€ to Dahisar € – Elevated
Total
Phase
Phase II
Phase II
Phase II
Phase I
Phase II
-
-
-
-
-
-
Planned length
(km)
63.0
72.1
23.1
31.5
-
28.8
37.6
22.9
42.0
28.0
32.2
37.7
104.0
43.0
26.0
42.0
18.5
23.5
33.5
32.0
24.0
14.5
16.5
854.0
Cost
(INR b)
360.0
264.0
65.8
101.8
15.0
103.0
109.0
70.0
80.0
60.0
75.0
107
550.0
130.0
68.0
36.0
64.0
100.0
244.0
120.0
84.1
66.7
62.1
3,031.3
Source: Industry, MOSL
Phase IIA
Phase IIB
Phase III
Phase IV
Phase V
Phase VI
Phase VII
Real Estate – commercial segment recovering
Residential Real Estate
The residential market of the top eight cities in India started off on a positive
note in CY16. Sales volume grew 7% YoY in 1HCY16; over 135,000 units were
sold in 1HCY16 as compared to 126,620 units in 1HCY15. However, following
demonetization in November 2017, transactions came to a complete standstill.
Developers refrained from announcing any new launches and buyers turned
extremely cautious.
Sales volume dropped 44% YoY in 4QCY16. New launches declined 61% YoY
during the same period. At 40,940 units, 4QCY16 sales volume was the lowest in
a quarter since CY10. The average quarterly sales used to be in excess of 90,000
units in CY10. The new launches number was much worse in 4QCY16 at just
24,300 units, not even one-fifth of the peak quarterly level observed in CY10.
All cities witnessed a crash in 4QCY16, including the usually resilient Bengaluru.
As a result, CY16 replaced CY15 as the worst performing year in terms of sales
volume in recent history. Sales volume in the top eight cities dropped 9% from
267,960 units in CY15 to 244,680 units in CY16.
Strict implementation of the Real Estate (Regulation and Development) Act,
2016 within the stipulated timeframe could be a major factor in bringing back
the confidence of homebuyers. Timely implementation of this Act across the
country would not only make the sector more transparent but would also help
attract institutional participation.
During January-March 2017 (1QCY17), residential project launches fell 8% YoY,
with the fall most severe decline being in the NCR. New launches are expected
to remain muted over the next 2-3 quarters, as developers make changes to
their business structure to align with the RERA norms.
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Capital Goods | Diesel Gensets
Exhibit 19: Residential unit launches have fallen over the
last five years across the top 8 cities in India…
Residential unit launches
485,000 465,000
458,228
420,105
319,659
244,069
175,823
Exhibit 20: …and so have residential unit sales
Residential units sales
360,000 375,000 359,308
329,238
279,822 267,957
244,680
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY10
CY11
CY12
CY13
CY14
CY15
CY16
Source: MOSL, Industry
Source: MOSL, Industry
Commercial Real Estate
CY16 closed with total transactions of 40.6msf, marginally lower than 41.1msf in
CY15. The potential demand for office space was much higher in CY16, but due
to shortage of good quality office space in prime locations of cities such as
Bengaluru, Pune and Chennai, many occupiers had to either delay or curtail
their leasable area. Additionally, the new supply that entered these six cities
during the year was just 29msf, down from 35msf in CY15.
The IT/ITeS sector continues to be the largest driver of office space in India; the
sector accounted for nearly half the transactions during 2HCY16. This was
followed by other services, which include sectors such as Consulting, Media,
Telecom and Infrastructure, at 21%. However, in Mumbai, it was the BFSI sector
that accounted for a lion’s share at 31% during this period.
Vacancy, which peaked at 20% in CY12, has been falling with each passing year
and is currently at one of its lowest levels in recent history at 13%.
Outlook:
In the first half of CY17, transactions are expected to be largely muted
and there would be pressure on prices. With consumers in a wait-and-watch
mode, demand could be subdued due to the mindset that property prices could
undergo reduction along with a substantial lowering of home loan interest rates.
Exhibit 21: Commercial property sales strong; vacancy rates
at multi-year lows
Commercial property sales(mn sq ft)
18%
18%
20%
19%
18%
Vacancy Rate(%)
40
16%
13%
Exhibit 22: Commercial property completions slid on weak
launches during CY12-14
Commercial property completion(mn sq ft)
45
42
38
36
35
30
38.2
CY10
38.6
CY11
30.5
CY12
35.2
CY13
38.6
CY14
41.1
CY15
40.6
CY16
CY10
CY11
CY12
CY13
CY14
CY15
CY16
Source: MOSL, Industry
Source: MOSL, Industry
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Capital Goods | Diesel Gensets
Datacenters – a huge opportunity for DG set manufacturers
A data center (or datacenter) is a facility composed of networked computers
and storage that businesses or other organizations use to organize, process,
store and disseminate large amounts of data.
A large datacenter uses as much electricity as a small town. Every datacenter
includes backup power supplies in the form of HHP DG sets. This power usually
requires multiple 750kVA-and-above DG sets. Key sectors looking at putting up
datacenters are BFSI, Social Media, Entertainment, Ecommerce and Telecom.
Exhibit 23: Investment in datacenters (USD b)
Global
152
APAC
178
India
200
141
30
2
FY14
37
3
FY16
44
5
FY18
55
7
FY20
Source: Industry, MOSL
According to a report by IAMAI (2016), the Indian datacenter market shows
promising growth over the next few years due to increased usage of data
through smartphones, social networking platforms, e-commerce platforms, and
government projects. The Indian datacenter infrastructure market was valued at
USD2.2b in CY16 and is expected to touch USD4.5b by CY18. It is predicted that
India would move to be the second-largest market for datacenters in the Asia
Pacific by 2020, with investments reaching USD7b or 4.5% of the global
investments.
Hotel occupancy at 9-year high – to drive new supply growth
For branded hotels in India, occupancy (in FY17) has risen to a 9-year high of
65%. The growth in occupancy and tariff is projected to continue in FY18 and
FY19, driven by macroeconomic growth, which has led to pick-up in travel and
accommodation needs. The last time Indian hotels saw their rooms this full was
in FY08.
Hotel room supply in India grew 7-8% in FY17 and HVS expects growth to remain
in this range for the next three years. However, demand is growing at 11-14%.
With demand outweighing supply and outlook for travel remaining positive, the
upward trend in occupancy rate is likely to continue.
Exhibit 24: Hotel occupancy rate at 9-year high
Occupancy rate
62.1
65.0
60.9
61.3
60.4
60.4
FY12
FY13
FY14
FY15
FY16
FY17
Source: HVS India, MOSL
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Capital Goods | Diesel Gensets
Shift from unorganized to organized segment – GST to hasten transition
We estimate that 30,000 DG sets are sold annually by the unorganized sector
and these account for 21% of the industry’s overall sales. The presence of the
unorganized sector would be largely in the LHP (<160kva) segment.
With GST expected to ensure better tax compliance and bring the unorganized
segment into the tax net, we expect the price gap between the unorganized and
organized players to narrow. With this, organized players should gain share.
Exhibit 25: DG industry - unorganized segment accounts for ~21% of volumes
Organised
Unorganised
29%
71%
Source: MOSL, Industry
Exhibit 26: Cummins India - DG sales by key end market
15%
10%
10%
10%
15%
20%
Manufacturing
20%
Real estate
Infra
Services
Retail
Hospitality
Others
Source: Company, MOSL
Exhibit 27: Cummins India rating wise sales: >750kva accounts for ~50% of sales in FY17
<160kva
160-380kva
6,300
5,470
2,300
2,670
2,770
FY11
4,750
1,950
2,370
3,560
FY12
2,500
3,000
4,000
FY13
3,800
1,650
2,300
3,300
FY14
4,600
5,500
1,300
1,150
2,500
FY15
1,800
2,700
3,250
FY16
5,740
1,840
3,240
2,700
FY17
420-625kva
>750kva
Source: Company, MOSL
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Capital Goods | Diesel Gensets
Brand, Distribution, Service, Product range key factors
Low pricing not enough to take market share
In the Indian DG market, while pricing is an important factor influencing the final
purchase decision, it is not the foremost reason. The key drivers for selecting a
particular manufacturer are: (a) brand, (b) distribution reach, (c) service and
spare part availability, and (d) product reliability and portfolio depth.
Increasingly, customers are looking at the life cycle cost of owning a DG set
rather than just the initial capital cost while making the purchase decision.
Capital cost constitutes only ~6% of the overall cost of ownership.
Exhibit 28: Breakup of various components in the operating costs of DG sets
Description
Diesel
Capital costs
Spares
% of total
85-90%
6%
4%
Source: MOSL, Industry
Exhibit 29: Market share in the Indian DG industry (by value)
Cummins
KOEL
15%
7%
16%
25%
Source: MOSL, Industry
37%
Mahindra
Perkins
Others
Fuel cost – no meaningful difference across brands
We compared the fuel consumption across brands for the most common nodes
in the industry, namely 15, 62.5, 200, 750 and 2,000kva-rated DG sets based on
the brochures available on the company websites.
We find no noticeable difference between the fuel consumption across Indian
and MNC brands – this is true across nodes. Clearly, fuel consumption is not the
differentiating factor in a customer’s decision to buy a DG set.
Exhibit 30: Fuel consumption by brand and kva ranges (Litres consumed per hour @75% load)
Name of Company
Mahindra Powerol
Greaves Cotton
Ashok Leyland
Kirloskar Oil
Caterpillar
Cummins India
MTU
Perkins
15kVA
2.7
2.8
3.0
3.0
NA
3.4
NA
NA
62.5kVA
11.3
11.1
11.3
11.3
NA
11.5
NA
NA
200kVA
33.3
35.4
34.0
34.4
NA
34.6
NA
NA
750kVA
2000kVA
NA
NA
NA
NA
NA
NA
126
NA
NA
NA
132
291
NA
NA
125
293
Source: Company, MOSL ** at 75% load
18 July 2017
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Capital Goods | Diesel Gensets
Brand positioning/ranking – Caterpillar best placed
We understand that Caterpillar has the highest brand equity in the DG market –
it is the customers’ first choice in areas having critical usage.
While pricing plays an important role in the LHP segment, in the MHP/HHP
ranges, it is the brand perception on reliability, performance, dealers and after
sales that determines the decision to purchase a particular brand.
Exhibit 31:
Brand positioning/hierarchy in the Indian DG industry
CAT
MTU, Perkins
Cummins
KOEL
Mahindra, Ashok Leyland, Eicher
Source: Company, MOSL
Product range – a key factor
Companies like Cummins and KOEL have a distinct advantage over their peers in
terms of product range offered. Cummins, which offers 44 nodes ranging from
7kva to 3,350kva, has the most comprehensive portfolio. KOEL comes a distant
second, with 27 nodes ranging from 3kva to 1,010kva (it launched its 750kva
offerings in FY16 and 900/1,010kva offerings in FY17). None of the other brands
in the Indian market have offerings spanning across the LHP, MHP and HHP
segments.
Exhibit 32: Company wise nodes on offers for the genset range
Name of company
CAT
Cummins
Greaves Cotton
KOEL
MTU
Perkins
Volvo Penta
Mahindra
Ashok Leyland
No of nodes
12
44
23
27
18
10
9
19
19
Source: Company, MOSL
18 July 2017
14

Capital Goods | Diesel Gensets
Exhibit 33: Product range of key players in the Indian DG industry
Description Caterpillar
KVA range
2.5
3
3.5
5
7.5
10
12.5
15
20
22.5
25
30
35
40
45
50
62.5
70
75
82.5
100
125
140
160
180
200
225
250
275
300
320
350
365
380
400
415
450
500
520
600
625
650
725
750
810
910
1010
1050
1135
1185
1250
1500
1650
1700
1750
1800
1815
1850
18 July 2017
200-3000
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
Y
N
Y
N
N
Y
N
Y
N
N
N
N
Y
N
Y
N
N
Y
N
N
N
Y
N
N
N
N
Y
N
N
N
N
N
N
Cummins
7.5-3350
N
N
N
N
Y
N
N
Y
Y
N
Y
Y
Y
Y
N
Y
Y
Y
N
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
N
Y
Y
Y
N
N
Y
Y
Y
Y
Y
N
Y
Y
N
Y
N
N
N
Y
Y
N
N
Y
Y
N
N
Greaves
KOEL
MTU
Perkins
Volvo
Mahindra Powerol Ashok Leyland
Cotton
Penta
2.5-500kva 3-1010kva 200-3100kva 400-2250kva 250-650kva
5-200kva
5-250kva
Y
N
N
N
N
N
N
N
Y
N
N
N
N
N
Y
N
N
N
N
N
N
Y
Y
N
N
N
Y
Y
Y
Y
N
N
N
Y
N
Y
Y
N
N
N
Y
Y
N
Y
N
N
N
Y
N
Y
Y
N
N
N
Y
Y
Y
Y
N
N
N
Y
Y
N
N
N
N
N
Y
N
Y
Y
N
N
N
Y
Y
Y
Y
N
N
N
Y
Y
N
N
N
N
N
N
Y
Y
Y
N
N
N
Y
Y
Y
N
N
N
N
N
Y
Y
N
N
N
N
Y
Y
Y
Y
N
N
N
Y
Y
N
N
N
N
N
N
N
Y
N
N
N
N
Y
Y
Y
Y
N
N
N
Y
Y
Y
Y
N
N
N
Y
Y
Y
Y
N
N
N
Y
Y
N
N
N
N
N
N
Y
Y
Y
N
N
N
Y
Y
Y
Y
N
N
N
Y
N
Y
Y
N
N
N
Y
Y
N
N
N
N
N
N
N
Y
Y
N
N
Y
N
Y
N
N
N
N
N
N
N
N
N
N
N
N
N
N
Y
Y
N
N
Y
N
N
N
N
N
N
Y
N
N
N
N
N
N
N
N
N
N
Y
N
N
Y
N
N
Y
Y
N
Y
N
N
N
N
N
N
N
Y
N
N
N
N
N
N
Y
N
N
Y
Y
N
Y
Y
N
N
N
N
N
N
N
N
N
N
Y
N
Y
Y
N
N
N
Y
N
N
N
N
N
N
N
N
N
Y
N
N
N
N
N
N
N
N
N
N
Y
N
Y
N
N
N
N
N
N
N
N
N
N
N
Y
N
N
N
N
N
N
Y
Y
Y
N
N
N
N
N
Y
N
N
N
N
N
N
Y
N
N
N
N
N
N
Y
N
N
N
N
N
N
N
Y
N
N
N
N
N
N
Y
N
N
N
N
N
Y
N
N
N
N
N
N
Y
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
Y
N
N
N
N
N
N
N
Y
N
N
N
15

Capital Goods | Diesel Gensets
Description Caterpillar
1875
2000
2050
2125
2250
2275
2350
2500
2550
2625
2725
2750
2800
2900
3000
3100
3350
3500
3750
No. of nodes
N
Y
N
N
N
Y
N
N
N
N
Y
N
N
N
Y
N
N
N
N
12
Cummins
Y
Y
N
N
Y
N
N
Y
N
N
N
Y
N
N
N
N
N
Y
Y
44
Greaves
Cotton
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
23
KOEL
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
27
MTU
Y
N
Y
Y
N
Y
Y
N
Y
Y
N
N
Y
Y
Y
Y
N
N
N
18
Perkins
N
Y
N
N
Y
N
N
N
N
N
N
N
N
N
N
N
N
N
N
10
Volvo
Penta
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
9
Mahindra Powerol Ashok Leyland
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
19
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
N
19
Pricing not the key differentiator, especially in MHP and HHP segments
Pricing is not the key determinant for the buying decision of a DG set. While it
plays a role in the overall purchase decision, our interactions with various
industry players indicate that pricing gets a low weightage.
On comparing the price points of DG sets for manufacturers across nodes, we
find that: (a) in the higher kva nodes, KOEL products are priced at 2-4% discount
to Cummins and Perkins, and (b) in the low kva (<160kva) nodes, Cummins’
products are 2-3% more expensive than KOEL and Mahindra.
Exhibit 34: Price points across key nodes for players in the DG set industry
Node
15kva
62.5kva
125kva
160kva
200kva
500kva
750kva
1010kva
1500kva
2000kva
Perkins
NA
NA
NA
NA
NA
2,250,000
3,650,000
5,100,000
8,200,000
11,200,000
Cummins
200,000
355,000
560,000
750,000
980,000
2,300,000
3,650,000
5,175,000
8,100,000
11,400,000
KOEL
200,000
345,000
560,000
745,000
945,000
2,200,000
3,500,000
4,900,000
NA
NA
Mahindra
195,000
345,000
560,000
740,000
940,000
NA
NA
NA
NA
NA
Source: MOSL, Industry
Our industry feedback suggests that Cummins has readjusted prices downwards
over the last few quarters – this is more so for the 750kva and above range,
where KOEL has made an aggressive entry. Cummins has reduced the prices of
its 750kva DG sets from INR4m-4.2m to INR3.7m, marginally above KOEL’s. This
is despite a sharp rise seen in pig iron pries over the last few quarters (see chart
below)
18 July 2017
16

Capital Goods | Diesel Gensets
Exhibit 35: Cummins gross margins inversely related to rise in pig iron prices
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
Pig Iron price(YoY)LHS
Gross margin change (YoY) RHS
10.0%
5.0%
0.0%
-5.0%
-10.0%
Source: MOSL, Company
Exhibit 36: Pig iron wholesale price index (50% of Cummins India raw material cost is pig
iron)
180
160
140
120
100
80
Pig Iron Wholesale Price India
135.5
Source: MOSL, Industry
Distribution network, service touch points key to sustained
market leadership
With most DG sets used for standby power, it is of utmost importance that they
are in working condition when needed, primarily during a power cut. This is the
reason why distribution/sales network and service plays the most important
role in the customer’s decision making process.
Exhibit 37: Distribution model for key players in the Indian DG set industry
Description
Scale of Ops
Sales Model
Caterpillar
National
OEM, Dealer
Driven
Cummins
National
OEM
Driven,
Service is
Cummins
3
Engines
Mechanical/
Electronic
Greaves Cotton
National
Procures
engines to
make gensets,
Service is
Greaves
6
Fully Built
Gensets
Mechanical
KOEL
National
OEM
Driven,
Service is
KOEL
11
Engines
Mechanical
MTU
National
OEM,
Dealer
driven
5
Engines
Electronic
Perkins
National
OEM Driven
for sales
and service
2
Engines
Mechanical/
Electronic
Volvo
Penta
Regional
Direct
Selling
Mahindra
Powerol
National
OEM,
Dealer driven,
Service is
Mahindra
13
Gensets for
telecom/Engines
for retail
Mechanical
OEM’s
Sales to
dealers
Engine
Types
2
Fully Built
gensets
Electronically
None
Engines
Electronic
Source: Industry, MOSL
18 July 2017
17

Capital Goods | Diesel Gensets
Our interactions indicate that Cummins has industry leading distribution
(through its three OEMs – Powerica, Jakson Power and Sudhir Genset) and
provides impeccable service through its own service team (some cities are also
serviced by its OEMs).
Exhibit 38: DG set manufacturers – manufacturing, sales and service network
Description
Presence
Market Share
Manufacturing
Product Range
Service Network
Sales Dealer
Installed engines
Caterpillar
>15 Year
5%
Hosur – Upto
750 KVA
200-3000kva
70
8
600+
Cummins
>15 Year
39%
Pune and
Phaltan
7-3350kva
180
84
350,000
Greaves
Cotton
>10 Years
3%
Aurangabad
2.5-500kva
21
60
NA
KOEL
MTU
Perkins
Volvo
Penta
Mahindra
Powerol
>10 year
18%
Domestic
5-200kva
>15 Year
<10 Year
>10 Year
>15 Year
26%
<5%
8%
<5%
Kagal
Imported
Aurangabad
Imported
Upto
(>750kva),
1010kva
<750kva - Imported
3-1,010kva 200-3000kva
200-2500kva
200-600kva
400+
173
600,000
4
NA
500+
100-150
100-150
2000+
NA
NA
270
177
500,000+
Source: MOSL, Industry
Product reliability – Technology and R&D key differentiators
R&D expenditure – benefit to MNC players of access to parent technology
Cummins India and Perkins/Caterpillar have a distinct advantage over their
Indian peers, as they have access to their parent’s technology and product
portfolio, which can be replicated and localized for the Indian market. This helps
them to have the shortest timeline to launch new products.
Globally, it has been seen that every time there is an emission norm change,
Cummins has taken market share. This is because it is usually the first to adapt
its engines to the new technology. Post the new emission norms in July 2014,
Cummins India was amongst the first to get its DG sets certified. Though it lost
market share in FY15, as the price hikes taken by it were ahead of peers, price
rationalization in FY16 helped Cummins to win back share.
Exhibit 39: R&D/royalty expenses across DG set players – in the 1.5-2% range
Name of Company
Greaves Cotton
KOEL
Cummins India
FY12
1.0%
1.3%
1.6%
FY13
1.2%
1.1%
1.4%
FY14
3.0%
1.3%
1.6%
FY15
1.7%
1.6%
1.5%
FY16
1.4%
1.8%
1.0%
Source: Company, MOSL
As we notice in the table above, R&D/royalty expenses are broadly in the range
of 1-2% of sales, with Cummins India being the foremost in terms of royalty
payments to parent. In the last five years, these have been 1.5% of sales for
Cummins and 1.4% for KOEL.
Given the nature of the product, warranty cost has to be provided at the time of
sales for the duration of the warranty based on historical claims – the industry
norm is 1.5-2%, which is where both KOEL and Cummins have historically been
placed.
Exhibit 40: Warranty cost – at 1.5-2% of sales for KOEL and Cummins
Name of Company
Greaves Cotton
KOEL
Cummins India
FY12
0.2%
1.3%
2.0%
FY13
0.5%
1.2%
2.5%
FY14
0.5%
1.3%
2.1%
FY15
FY16
0.5%
0.4%
1.3%
1.6%
1.7%
1.9%
Source: Company, MOSL
18 July 2017
18

Capital Goods | Diesel Gensets
Competitive pressure intensifies
HHP segment being targeted as it is the most profitable
Within the Indian DG sets market, the LHP (<160kva) segment is the most
competitive, with the presence of 8-10 organized (primarily Indian) players
along with Chinese and local players. Price is the key criterion for decision
making, and therefore, margins are also the lowest in this segment.
Exhibit 41: End market usage by ratings of DG sets
Ratings Segment
<160 kVA (Low)
200-375 kVA (Mid)
375-750 kVA (Heavy)
750-3,000 kVA (High)
End Use Industries
Telecom(15-75kva), Retail sales, Small scale Industries Units
Real Estate(Residential and Commercial), Hospitals
Large Industrial Applications, IT, ITES, Hospitals, Hotels, Healthcare
Data Centers, Metros, Hospitals, Educational Institutions
Source: Industry, Motilal Oswal
KOEL, Ashok Leyland and Mahindra have traditionally been very strong in the
low and medium horse power DG set market. However, in a change of strategy
from CY10, KOEL launched its DV Series (320-625kva) and this was followed by
the launch of its 750kva DG sets in FY16. In FY17, KOEL has also launched its
910kva/1,010kva DG sets. It has taken a ~5% share in the HHP segment, with
sales of ~75 units in FY17. KOEL further intends to launch its 1,250kva and
1,500kva DG sets over the next 24 months. The >750kva is dominated by
Cummins India, which has historically had >50% market share in this segment.
Perkins has recently started its plant to manufacture engines for the 4,000 series
(>750kva) at Aurangabad. This would help to reduce the cost of manufacturing
the engines, which would have a greater proportion of localized components.
We understand that Perkins has cut prices following increased localized content
in its DG sets. In the second phase of expansion, Perkins intends to expand its
range to manufacture smaller (>200kva) engines as well.
Exhibit 42: Players in the Indian DG set market
Players in the Indian DG market
kVA
Low
15 - 75
Mahindra
KOEL
Eicher
Cummins
Ashok Leyland
Escorts
Cooper Corporation
JCB India
FG Wilson
Telecom,
Commercial
complex, Hospitality,
Small restaurants
Mid
75-375
KOEL
Cummins
Greaves Cotton
Ashok Leyland
Mahindra
Cooper Corporation
FG Wilson
Volvo Penta
Large Industries, Real
Estate, Healthcare,
Hospitality, Infra
Heavy Duty
375-750
Cummins
KOEL
Greaves Cotton
CAT Perkins
Volvo Penta
MTU
High horse power
750 - 3,000 kVA
Cummins
CAT Perkins
MTU
KOEL
End Markets
Large industries,
Real Estate,
Healthcare,
Hospitality,
IT&ITES, Roads,
Metros
IT/ITES, Large industries,
Real Estate, Metro, Rail,
Hospitals, Malls, Data centres
Source: Industry, Motilal Oswal
18 July 2017
19

Capital Goods | Diesel Gensets
Exhibit 43: Distribution model for key players in the Indian DG set industry
Description
Scale of Ops
Sales Model
Caterpillar
National
OEM, Dealer
Driven
Cummins
National
OEM Driven,
Service is
Cummins
3
Engines
Greaves Cotton
National
Procures
engines to
make gensets,
Service is
Greaves
6
Fully Built
Gensets
Mechanical
KOEL
National
OEM
Driven,
Service is
KOEL
11
Engines
MTU
National
OEM,
Dealer
driven
5
Engines
Perkins
National
OEM Driven
for sales
and service
2
Engines
Volvo
Penta
Regional
Direct
Selling
Mahindra
Powerol
National
OEM,
Dealer
driven
13
Genset for
Telcom
/Engine for
retail
Mechanical
GOEM’s
Sales to
dealers
Engine Types
2
Fully Built
gensets
Electronically
None
Engines
Mechanical/
Electronic
Mechanical
Electronic
Mechanical/
Electronic
Electronic
Source: Industry, MOSL
Our interactions with various industry players indicate increased competitive
intensity across segments in the DG industry. We examine each segment:
Low HP (15-75kva):
While this segment has traditionally been dominated by
Mahindra, Ashok Leyland and KOEL, new players like Cooper Industries, FG
Wilson, JCB India and Cummins India are also looking to make inroads and
increase their share. This segment accounts for the highest volumes in the
Indian DG market, but profitability is low due to intense competition, resulting
in high pricing pressure for the incumbents.
Midrange (75-375kva):
While KOEL and Cummins are the dominant players in
this segment, competition from Mahindra, FG Wilson, Cooper Corporation and
Ashok Leyland is increasing. Mahindra is currently in the <200kva segment, but
is also launching the 250/320kva nodes in the next two quarters – it has bought
the technology from Navistar and is planning a commercial launch in 2QFY18.
This would imply higher competition in this segment for Cummins and KOEL.
Perkins intends to start domestic manufacturing of its 2000 series (400-650kva)
in CY18 at its Hosur plant – currently, it is importing this range and is not
competitive versus peers. With the start of production in Hosur, it intends to
increase presence in the MHP range over the next two years.
High HP (>750kva):
This is the most attractive segment in terms of profitability
and per unit value is the highest in this segment. Traditionally, Cummins has
been the dominant player in this segment, with >55-60% market share, followed
by Perkins and Caterpillar. New entrants in this range include KOEL (launched its
750kva node in FY16) and MTU India.
18 July 2017
20

Capital Goods | Diesel Gensets
Exhibit 44: Comparison of key features at the 750kva node across manufacturers
Description
Price
Frequency (Hz)
Fuel Consumption
Fuel Tank Capacity (Ltrs)
Overall Dimensions (mm)
KOEL
35,00,000
50
154
126.4
990
6800
2300
2713
NA
NA
24
12
< 75
8,700
Cummins
36,50,000
50
166.42
132.4
990
8000
2600
3000
155
0.24
38
12
75
11,900
Perkins
36,50,000
50
169.83
124.96
990
7200
2300
3296
115
0.1% of SFC
23
6
NA
8,897
100% (Ltrs/hr)
75% (Ltrs/hr)
Length
Width
Height
Lube oil system Capacity (Ltrs)
Lube oil consumption
Engine Capacity ( Ltrs) / displacement
No. of Cylinders
Noise (dBA)
Wet Weight (kg)
Source: Company, MOSL
Exhibit 45: Cummins India: >750kva rating contributed 50% of sales in FY17
<160kva
15,000
10,000
5,000
-
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
160-380kva
420-625kva
>750kva
18 July 2017
21

Capital Goods | Diesel Gensets
Market positioning (presence in each range) and change in positioning targeted
750kva and
Name of company
15-75kva
75-375kva
375-750kva
above
Cummins India
Brand
Cummins
KOEL
Kirloskar Green
Mahindra
Ashok Leyland
Eicher
Greaves Cotton
Caterpillar
Perkins
MTU




-
-
-
-
-
-
-
-
-
-
-
-
Mahindra Powerol
Leypower
Multi brand
Greaves Power
CAT
Perkins
MTU

LOW
HIGH
LEADER

MEDIUM
-
N.A.
Our analysis of Cummins’ pricing by segment reflects a significant fall only in the
low kva (<160kva) segment; in all other segments, pricing has remained flat or
higher (YoY). The improvement in the >750kva node could be due to (a) higher
share of 1,010/1,500kva nodes in FY17, which has led to an improvement in
pricing in this segment – our channel checks suggest that Cummins has taken a
10% cut in prices for the 750kva node, and (b) price cuts taken only in 2HFY17 –
would start reflecting FY18 onwards.
Exhibit 46: Cummins India – realization largely stable across nodes ex low kva range (INR
m/unit)
Category
Low kva (< 160kva)
Mid kva (160-380kva)
Heavy Duty (420-640kva
High Kva (>750kva)
FY16
0.23
0.75
1.51
4.08
FY17
Change (%)
0.19
-18%
0.82
10%
1.46
-3%
4.54
11%
Source: MOSL, Industry
18 July 2017
22

Capital Goods | Diesel Gensets
Diesel Genset industry back on growth track
Infrastructure spending is the key driver
We highlight feedback from our extensive meetings across key genset
manufacturers, Genset OEM’s and dealers over the past one month:
Cummins India
Cummins expects to grow at a CAGR of 10-12% over the next few years. The key
end markets driving growth for Cummins are Manufacturing, Infrastructure,
Datacenters, SEZs, Hotels, and Hospitals.
It has taken market share across product ranges and growth should pick up with
revival in Manufacturing and Infrastructure.
Real Estate demand has been weak for the last few years and RERA would not
have a material impact on Cummins’ sales to the segment.
Cummins is focused on market share; it is willing to accept lower margins to
sustain and enhance market share.
The company has >60% share in the >750kva segment and has realigned prices
with competition in this segment.
Cummins expects a smooth transition to the GST regime. Demonetization had
also not had a major impact on the company.
Cummins India GOEM
The OEM expects the market to grow 10-15% in FY18. Key end markets driving
growth are Roads, Metros, Retail, MMSE, and Real Estate (affordable housing).
Cummins gained share in FY17 despite KOEL entering the HHP (>750kva) range.
Cummins’ DG sets offer unmatched reliability and service. The company has
always had competition in prices – earlier, it was Perkins, and now it is KOEL.
KOEL's HHP range likely to take share in government jobs (lowest bidder) and
small real estate developers. Reputed developers are likely to prefer Cummins,
especially since the price differential with KOEL has reduced.
Sales could weaken in the last week of June, given the impending GST
implementation.
Unlike KOEL and Mahindra that took 2-5% price hikes recently, Cummins has not
planned any price increases.
Mahindra Powerol
In FY18, Mahindra expects 3-4% growth in the low kva segment and 10-12%
growth in the higher kva segment.
Mahindra is present primarily in the lower kva (15-200kva) segment. It intends
to launch its 250kva and 320kva products in July. It also imports and sells
Scania/Perkins DG sets in the 200-400kva range.
The key segments that Mahindra targets are Real Estate, Education, Telecom,
Shops, and Offices.
Its competitive advantages in the 250/320kva segment are: (a) service, (b)
distribution, and (c) technology – has taken technology from Navistar.
18 July 2017
23

Capital Goods | Diesel Gensets
Currently, it sells 18,000 units per year to Telecom and 18,000 units per year to
Retail and Infrastructure. It derives INR7.5b sales annually from DG sets
(primarily to the telecom sector) and engines.
The company is planning tie-ups to get into the 625/750kva range as well.
Sale of DG sets to the Telecom industry declined from 100,000 units in FY09 to
15,000 units in FY14/15. Mahindra being the leader in this segment was
impacted the most. In FY17, the Telecom industry bought 30,000 DG sets – of
these, Mahindra accounted for 18,000 units and Eicher for 5,500 units.
Cummins’ margins would be hit, as it has reduced prices after KOEL’s entry in
the >750kva range. Cummins sells its 750kva product at INR3.7m (down from
INR4.1m earlier) v/s KOEL’s INR3.6m.
Perkins sells 600-700 units annually in India. It also exports to China from
Aurangabad, enabling it to gain economies of scale. The resultant reduction in
its cost/unit could make it a threat to Cummins.
Kirloskar Oil Engines GOEM
KOEL sells its 3-5kva range under the KOEL
Chotta Chilli
brand, and its 15-
1,010kva range under the KOEL Green brand.
KOEL sold 30,000 units in FY16 and 36,000-38,000 units in FY17. It introduced
750kva and 1,010kva products in FY17.
In FY18, growth is likely to be 5-10%. RERA will imply that existing projects get
completed on time, but new project launches will be delayed. FY19 could be
weak.
KOEL is winning share in the 750kva range, given its brand and product
reliability.
Within the 750kva node, prices have dropped 5-7%. Earlier, Cummins had a
monopoly in the 750kva and higher ratings. Now, the customer has a choice
between KOEL and Cummins.
Perkins has not done as well due to fewer GOEMs and service points, and also a
limited product range.
Cummins has a good product range, reliable products, competitive pricing, and
good GOEMs.
Perkins India
After three years of subdued demand (CY13-15), the HHP (>750kva) segment
saw a revival from CY16, with 3-4% growth. Perkins India expects a high single-
digit growth in CY17.
Key end markets driving growth are Datacenters, Metros, Commercial Real
Estate, Roads, and Manufacturing. Demand from Datacenters is likely to grow at
a CAGR of 15% over the next 3-4 years. Demand from Metro Rail projects is seen
at 200-300 units per year for the next few years.
Entry of a new competitor (KOEL) in the HHP segment has led to price cuts by
Cummins, which does not want to let go market share. Perkins has maintained
prices. KOEL has a credible product but larger developers (like Brigade and
Prestige) are likely to stay with Cummins/Perkins.
Perkins will start manufacturing the 2000 series (400, 500, 625kva) at the Hosur
plant in CY18. It will initially cater only to the power generation segment.
Currently, it is not catering to the industrial engines market (60,000-70,000
18 July 2017
24

Capital Goods | Diesel Gensets
engines annually) as it does not manufacture the 2000 series (entirely
imported). After start of production in Hosur and pick-up in volumes, it will
begin producing industrial engines (2000 series) too. Industrial engines are
doing well for Cummins and KOEL (Roads, Mining, Railways, Defense).
The Aurangabad plant is working at 60-70% capacity. Of the ~2,100 units it
produces, 30% are for domestic (500-600 units) and 70% for overseas markets.
Perkins India dealer
The dealer was optimistic on the HHP (>750kva) segment, with high enquiry
levels and customers willing to convert enquiries into firm orders. Similar trends
are also being witnessed in the MHP (250-650kva) range.
Key end markets seeing a revival include: (a) Datacenters (>1,000kva), (b)
IT/ITES, (c) Roads (200/500/600kva), (c) Metros (500/750kva), (d) Malls, (e)
Hospitals, (f) Hotels, (g) Educational Institutions, and (h) Rail (500/750kva).
The dealer expects 10-15% growth in MHP/HHP sales in FY18 for the industry
while LHP (<160kva) sales would remain subdued on lower sales to Telecom.
KOEL is a credible competitor in this range, where there were only four players
earlier – Cummins, MTU, Perkins and Caterpillar. Cummins, Perkins and
Caterpillar together have 75-80% share in this segment. Annual size of this
market is ~2,400 units, with Cummins having 60-70% of the market.
KOEL's 750kva and above range is primarily preferred by real estate developers
and government tenders, where the lowest bidder wins. However, in case of
critical applications, KOEL is unlikely to break in.
KOEL's pricing is quite aggressive, and due to this, Cummins was also forced to
reduce prices. Perkins has, however, maintained its prices.
KOEL was also present in the MHP range, with its DV Series (325-650kva), but
was not able to significantly affect Cummins's share. It could face a similar issue
in the HHP (>750kva) segment, as well.
In the HHP segment, product reliability, quality and service are paramount –
Cummins, Caterpillar and Perkins are ahead of KOEL in this regard. For example,
within Datacenters, customers are unlikely to go with KOEL.
The 750kva segment involves not just supplying a product, but putting up a
project – installation of exhaust systems, controls, and taking care of space
requirements. KOEL might lose out on this.
The impact of GST is likely to be higher in the LHP segment. In the HHP segment,
taxes are a pass-through, and so, GST is unlikely to have a material impact.
18 July 2017
25

Capital Goods | Diesel Gensets
Key players in the Indian DG set market
India a key focus market for MNCs
Cummins India
Cummins has been present in India for over 55 years and has built a reputation
founded on its strong dealer/distribution network, product quality, and after-
sales support.
It supplies engines to three OEMs — Powerica, Jakson Power, and Sudhir
Gensets. The OEMs assemble the DG sets by adding alternators, canopies, and
control panels — these are then sent to dealers across India for sale to
customers.
Exhibit 47: Cummins Power Generation range
Source: Cummins India
Exhibit 48: Cummins India operates through three OEMs in India
Partner
Jacksons
Partner P /Powerica
Sudhir Gensets
Incorporation
1947
1984
1973
Areas of Operation
North and North-East
India
West and South
North and North-West
India
Manufacturing
Daman
Daman, Bangalore, Dadra and
Nagar Haveli
Silvassa, Jammu, Gurgaon
Source: Industry, MOSL
18 July 2017
26

Capital Goods | Diesel Gensets
Exhibit 49: Cummins India engine range and litres
kVA
7.5 - 25 (Low range)
30 - 62.5 ( Low range)
140 - 225 (Low range)
250 - 320 (Mid-range)
320 - 400 (Heavy duty)
500, 520-650, 750
600-625 (High horse power)
1500,1750-1800
1875-3350 (High horse power)
Series
X
S/B
B /QSB
C /L/QSL
N/QSN
K/QSK
V
QSK
QSK
Displacement (Litres)
1.3, 1.7, 2.5
3.8
5.9
8.3
14
19, 38
28
50
23,60,78
Source: Company, MOSL
Caterpillar India
In India, Caterpillar sells 200-3,000kva DG sets, gas-based generator sets, and
also rents out 200-2,000kva generator sets. Caterpillar has a manufacturing
facility in Hosur, Tamil Nadu. The unit specializes in the design and manufacture
of internal combustion engines, genset packages, and components. The product
range includes diesel engines, gas-engine long blocks, and electric power
generator sets. Product ratings range from 200kva to 2,000kva, covering families
like 3300, 3400, C series, and 3500. The facility employs over 300 people.
Caterpillar’s Hosur facility has an extensive customer base across India, China,
Indonesia, Australia, Europe, and North America. The unit assembles 200-
3,000kva engines, makes DG engines of up to 750kva, and imports/assembles
engines >750kva. It has a machining shop for marking components that fit into
the engine. It produces ~400 engines a month, that is, ~5000 engines per annum
using a single shift. It has the capacity to double production by using two shifts.
Exhibit 50: Caterpillar distributor network in India
Source: Industry, MOSL
Caterpillar has also launched its FG Wilson brand in the 10-250kva segment to
take on the likes of Cummins India, KOEL and Mahindra. It is using engines
supplied by Cooper Corporation. The range is used primarily at construction
sites, by telecom networks, factories, hospitals, commercial premises, and
residential properties.
18 July 2017
27

Capital Goods | Diesel Gensets
Perkins India
Perkins has recently started its manufacturing facility in Aurangabad, Shendra
Industrial Area. The facility will manufacture its 4000 Series engines, with power
outputs of 700-2,000kva. The estimated cost is ~INR8b; initial production
capacity of 3,000 units will be extended to 5,000 units. The new plant will help
meet growing demand for engines from Asian markets. The 120,000 square
meter site (including a 40,000 square meter manufacturing area) will also
undertake machining, assembly and testing, and paint and packaging.
Exhibit 51: Perkins factory layout
Source: Industry, MOSL
In India, Perkins has two distribution partners – GMMCO Power and Powerparts
Private Limited. GMMCO mainly concentrates on the Southern and Western
states, while Powerparts takes care of the Northern and Eastern regions.
GMMCO Power:
Territories supported include Andaman and Nicobar Islands,
Andhra Pradesh, Chhattisgarh, Dadra and Nagar Haveli, Daman and Diu, Goa,
Gujarat, Karnataka, Kerala, Lakshadweep, Madhya Pradesh, Maharashtra,
Pondicherry, and Tamil Nadu.
Powerparts:
Territories supported include Arunachal Pradesh, Assam, Bihar,
Chandigarh, Delhi, Haryana, Himachal Pradesh, Jammu and Kashmir, Jharkhand,
Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Punjab, Rajasthan, Sikkim,
Tripura, Uttar Pradesh, Uttarakhand, and West Bengal.
18 July 2017
28

Capital Goods | Diesel Gensets
Kirloskar Oil Engines
KOEL is one of the major DG set manufacturers in India, especially in the low-to-
mid-end segment; recently, it has also entered the HHP segment. It has a
presence in the power generation sector and caters to the agriculture and
industrial segments. It also exports engines to the Middle East and African
markets. KOEL has four manufacturing facilities — one each in Nasik, Pune,
Rajkot, and Kolhapur.
KOEL had a tie up with Cummins in the 1990s; since they parted ways, KOEL has
been selling gensets under its own brand. KOEL has a very strong market share
in the LHP/MHP segment, and is a close number-2 to Cummins and Mahindra.
It launched its 750kva DG sets in FY16 and managed to take 10-12% share in this
segment. Its recent launch of 910/1,010kva DG sets has also been received well
by customers and it intends to double its sales of >750kva DG sets in FY18. It has
also started working on 1,500/2,400kva DG sets, which it intends to launch in 24
months.
Exhibit 52: KOEL DG set for power generation
Exhibit 53: Large engine used in captive power plants
Source: MOSL, KOEL
Source: MOSL, KOEL
Exhibit 54: KOEL agriculture tillers
Exhibit 55: KOEL industrial engines
Source: MOSL, KOEL
Source: MOSL, KOEL
It sells its smaller DG sets (5-15kva) under the KOEL Chotta CHilli brand and its
larger DG sets (15-1,010kva) under the KOEL Green brand.
18 July 2017
29

Capital Goods | Diesel Gensets
Mahindra Powerol
Mahindra & Mahindra operates in the DG business under the Mahindra Powerol
brand. It produces 5-200kva DG sets and has a strong presence in the Telecom
industry. Powerol also has a presence in banks, buildings, hospitals, hotels, and
the manufacturing segments.
It has OEMs in major cities across 15 states. Mahindra Powerol DG sets are
manufactured at two factories located at Pune and Delhi, with a combined
manufacturing capacity of over 30,000 sets a year.
Exhibit 56: Mahindra Powerol factory
Exhibit 57: Mahindra Powerol DG set
Source: MOSL, KOEL
Source: MOSL, KOEL
Ashok Leyland Leypower
Ashok Leyland (AL) manufactures 5-2,250kva DG sets. It has an installed base of
over 0.2m DG sets across the country. It sources engines of >400kva from
Perkins.
Its DG sets meet the latest CPCB norms in India and are made to meet
international norms. AL’s sets are powered by the compact 4, 6, 8, and 12-
cylinder series of diesel engines. Its DG sets are silent, environment-friendly,
require minimum maintenance, and are low on operating costs.
Leypower DG sets are manufactured in plants located across six units in the
country. The present range extends from 10-2,250kva, with generating sets
manufactured to operate under arduous conditions. It has OEMs present across
20+ states in India.
Exhibit 58: Ashok Leyland DG set
Exhibit 59: MS Dhoni as the brand ambassador
Source: MOSL, Industry
Source: MOSL, Industry
18 July 2017
30

Capital Goods | Diesel Gensets
What goes into making a DG set?
The engine is the heart of the machine
Exhibit 60: The engine is the heart of the diesel generator set
Source: MOSL, Industry
Exhibit 61: Typical layout of a DG set assembly plant
Excitation Control
Diesel Engine
A.C. Generator
Controls
Load
Fuel Control
Accessories
Foundation
Source: MOSL, Industry
18 July 2017
31

Cummins India
BSE SENSEX
31,711
S&P CNX
9,827
18 July 2017
Capital Goods | Diesel Gensets
Update
| Sector:
Capital Goods
CMP: INR933
TP: INR1,110 (+18%)
Upgrade to Buy
Infrastructure spend to drive domestic growth
Exports to witness pickup in 2HFY18
Expects double-digit growth in domestic sales, driven by infrastructure
spending
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
Financials Snapshot (INR b)
Y/E MAR
Net Sales
EBITDA
Adj PAT
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2017 2018E 2019E
50.8
56.6
65.5
8.0
9.1
11.4
7.3
8.1
10.0
26.5
29.2
36.0
-2.6
10.1
23.4
135.0 146.2 160.1
21.2
20.7
23.5
20.0
19.8
22.5
35.2
32.0
25.9
6.9
6.4
5.8
KKC IN
277.2
1096 / 748
-1/-4/-1
258.6
4.0
274
49.0
Cummins India (KKC) has witnessed a pick-up in domestic demand, driven by strong
infrastructure spending by the government. Over the medium term, the company
expects domestic sales to register double-digit growth, given strong infrastructure
spending and a pick-up in demand for backup power.
Growth in domestic sales is expected to be driven by:
Industrial segment:
Industrial segments such as road construction, railways
and mining provide strong opportunities, given the government’s focus on
infrastructure development. Over the medium term, KKC expects growth in the
industrial genset segment to be better than in the power generation segment.
Power generation segment:
Growth in this segment is expected to be directly
correlated to domestic GDP growth, driven by back-up power installations by
end-consumers. Revival is seen in the key end-markets of IT/ITES, hotels,
hospitals, data centers.
Distribution segment.
Gains share in high horse power (HHP) segment, despite fierce
competition
Competition in DG sets remains intense, as demand has been subdued during the
past few years. Despite this, KKC has been able to gain share, given its focus on (1)
retaining market share (taken two price cuts in the last three quarters in response
to rising competition), and (2) providing an improved product offering (via better-
technology engines, strong service, OEM/dealer network, and spare part
availability to ensure minimum downtime). KKC has also reduced product costs
through value engineering.
Shareholding pattern (%)
As On
Mar-17 Dec-16 Mar-16
Promoter
51.0
51.0
51.0
DII
20.9
20.3
18.3
FII
15.0
15.7
16.5
Others
13.2
13.0
14.2
FII Includes depository receipts
Stock Performance (1-year)
Cummins India
Sensex - Rebased
1,100
1,000
900
800
700
Strong growth in distribution business, led by higher industrial
contribution
Distribution & Spares business is likely to perform well, given higher sales
contribution from the industrial segment, where machine usage is intense (the
consequent wear and tear augments the need for spares). Also, given the large
installed base of machines, demand for spares is expected to remain robust.
Exports muted; revival expected from 2HFY18
Exports have been weak, given bleak demand from end-markets like Africa, LATAM
and the Middle East. However, we expect demand to revive from 2HFY18, given
the increase in commodity prices. In the long run, the company has guided for low-
double-digit growth in exports.
18 July 2017
32

Capital Goods | Diesel Gensets
Margins to improve in 2HFY18, supported by export pick-up
KKC’s gross margin contracted 160bp to 35.5% in FY17 due to (a) declining
contribution from exports (33% of sales v/s 37% in FY16), which command better
margins than domestic sales, (b) higher share of industrial sales, and (c) adverse
product mix. We expect margin expansion in FY18, with pick-up in exports.
Valuation and view
KKC has, over the years, developed (a) strong product portfolio with superior
technology to meet domestic demand, (b) wide distribution network to provide
superior after sales service to customers, and (c) cost-effective products to maintain
leadership in a fiercely competitive market. Given strong infrastructure push, initial
signs of pick-up in the power genset segment, and expected revival in the export
segment from 2HFY18, we upgrade our rating to BUY. We also revise our target
price to INR1,110 (30x June 2019E EPS; in line with 5-year average). The stock
currently trades at 34x FY17E EPS of INR26.5, 31x FY18E EPS of INR30.9 and 25x
FY19E EPS of 35.5. Key risks to our rating are: (a) weaker-than-expected revival in
the domestic power generation market, and (b) persisting weakness in commodity
prices, leading to a delay in pick-up of LHP exports.
18 July 2017
33

Capital Goods | Diesel Gensets
Exhibit 62: KKC’s market share in the power genset segment
Cummins Power Gen sales
Market share(%)
41% 39%
Exhibit 63: Market share by players
15%
7%
16%
37%
22%
27%
35% 35% 37% 34% 35%
31% 31% 31%
Cummins
KOEL
Mahindra
Perkins
Others
25%
Source: MOSL, Company
Source: MOSL, Company
Exhibit 64: Segment-wise revenue break-up (FY17)
Power Generation
33%
28%
Industrial
Exhibit 65: Sales expected to register double-digit growth,
driven by pick-up in infrastructure segment
Sales (INR m)
11.5
1.8
10.8
Growth YoY (%)
11.5
15.6
6.9
7.8
Automotive
14%
24%
2%
Source: MOSL, Company
Distribution and spares
Exports
41,172 45,894
39,767
-13.4
44,058 47,088 50,773 56,624 65,457
Source: MOSL, Company
Exhibit 66: EBIDTA margin to improve, with pick-up in
exports segment
EBIDTA (INR m)
18.2
16.9
17.5
16.7
16.5
15.8
8,018
15.9
EBIDTA margin (%)
Exhibit 67: Robust return ratios, despite weak business
scenario
RoE (%)
38
RoCE (%)
17.3
33
28
23
6,972
8,349
6,968
7,351
7,751
9,031 11,343
18
Source: MOSL, Company
Source: MOSL, Company
18 July 2017
34

Capital Goods | Diesel Gensets
Operating metrics
FY12
Segmental Revenue (INR m)
Power
- MHP / HHP
- LHP
Industrial
Auto
Distribution
- Spare Parts
- Recon
Domestic
Exports
- HH / HHP
- MHP / LHP
Net Sales
Growth (%)
RM Costs (%)
Gross Margins (%)
EBITDA margin (%)
Net Working Capital (Days)
Net Cash / (Debt), INR M
12,562
9,002
3,560
5,673
2,837
7,699
7,699
28,770
11,720
9,520
2,200
41,172
2%
64.3%
35.7%
16.9%
63.4
2,088
FY13
16,065
16,065
4,000
5,060
1,659
9,080
9,080
nm
31,864
12,690
8,810
3,880
45,894
11%
62.9%
37.1%
18.2%
65.5
3,547
FY14
11,150
7,850
3,300
5,248
1,162
9,090
9,090
nm
26,650
12,040
8,240
3,800
39,767
-13%
61.0%
39.0%
17.5%
81.0
865
FY15
10,550
8,050
2,500
5,070
1,100
9,050
8,800
250
25,770
17,253
9,003
8,250
44,058
11%
61.8%
38.2%
16.7%
82.9
799
FY16
12,500
9,250
3,250
5,600
700
10,000
9,600
400
28,800
16,670
7,770
8,900
47,088
7%
62.9%
37.1%
16.5%
97.8
897
FY17
13,500
10,088
3,413
6,960
850
11,610
10,810
800
32,920
16,110
8,306
7,804
50,773
7%
64.5%
35.5%
15.8%
85.9
-1,217
FY18E
15,255
11,672
3,583
8,352
510
13,352
12,551
801
37,469
17,680
8,160
9,520
56,558
11%
63.8%
36.2%
16.1%
85.9
1,135
FY19E
17,543
13,781
3,762
10,022
510
15,354
14,552
802
43,430
20,487
9,287
11,200
65,493
16%
63.3%
36.7%
17.5%
85.9
2,458
18 July 2017
35

Capital Goods | Diesel Gensets
Financials and Valuations
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 (%)
2013
45,894
11.5
28,874
3,386
5,285
8,349
18.2
473
1,577
46
9,407
2,774
29.5
6,633
1,008
7,641
29.2
2014
39,767
-13.4
24,241
3,396
5,162
6,968
17.5
528
1,777
42
8,175
2,175
26.6
6,000
0
6,000
-21.5
2015
44,058
10.8
27,225
3,936
5,547
7,351
16.7
797
2,866
45
9,374
1,515
16.2
7,859
0
7,859
31.0
2016
47,088
6.9
29,622
4,156
5,559
7,751
16.5
810
2,259
96
9,104
1,561
17.1
7,543
0
7,543
-4.0
2017
50,773
7.8
32,745
4,334
5,677
8,018
15.8
848
2,080
168
9,082
1,736
19.1
7,346
0
7,346
-2.6
2018E
56,558
11.4
36,080
5,183
6,209
9,086
16.1
981
2,185
168
10,123
2,036
20.1
8,087
0
8,087
10.1
(INR Million)
2019E
65,493
15.8
41,452
5,806
6,794
11,441
17.5
1,043
2,263
168
12,493
2,513
20.1
9,980
0
9,980
23.4
2020E
74,913
14.4
47,414
6,751
7,434
13,313
17.8
1,106
2,344
168
14,384
2,893
20.1
11,490
0
11,490
15.1
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.
Current Liabilities
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2013
554
23,313
23,867
0
328
24,195
10,415
5,480
4,934
1,208
6,276
24,278
5,304
8,550
3,547
6,788
90
12,501
7,719
4,782
11,777
24,195
2014
554
25,097
25,652
0
465
26,117
15,120
5,928
9,192
958
4,954
22,625
5,513
7,820
865
8,405
22
11,611
6,910
4,701
11,014
26,117
2015
554
28,311
28,865
0
631
29,496
18,830
6,491
12,340
1,706
4,650
24,521
6,823
9,355
799
7,472
73
13,721
8,520
5,202
10,800
29,496
2016
554
34,259
34,813
0
128
34,941
19,917
7,023
13,172
5,192
3,336
23,483
6,003
9,381
897
1,287
5,915
9,964
8,843
1,121
13,519
35,219
2017
554
36,867
37,422
2,508
24
39,953
22,705
8,444
14,261
4,631
7,074
23,702
5,621
9,557
1,291
1,287
5,948
10,455
9,036
1,419
13,247
39,213
2018E
554
39,982
40,537
2,508
24
43,068
24,205
8,657
15,547
4,631
7,074
27,985
6,105
10,380
3,643
1,397
6,460
11,356
9,815
1,541
16,629
43,881
(INR Million)
2019E
554
43,827
44,381
2,508
24
46,913
25,705
9,701
16,004
4,631
7,074
33,179
7,076
12,030
4,966
1,620
7,487
13,162
11,376
1,786
20,017
47,726
2020E
554
48,253
48,807
2,508
24
51,339
27,205
10,807
16,397
4,631
7,074
39,137
8,111
13,790
6,796
1,857
8,583
15,088
13,040
2,048
24,049
52,152
18 July 2017
36

Capital Goods | Diesel Gensets
Financials and Valuations
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
RoIC
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors. (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2013
23.9
25.6
86.1
13.0
47.2
2014
21.6
23.5
92.5
13.0
60.1
43.1
39.6
37.0
6.6
10.1
1.4
34.7
30.0
44.4
68
42
46
1.9
0.0
24.2
24.4
29.1
72
51
45
1.5
0.0
2015
28.3
31.2
104.1
14.0
49.4
32.9
29.9
35.1
6.0
9.0
1.5
28.8
29.0
26.4
78
57
51
1.5
0.0
2016
27.2
30.1
125.6
14.0
51.5
34.3
31.0
33.3
5.6
7.4
1.5
23.7
23.9
24.0
73
47
43
1.3
0.0
2017
26.5
29.6
135.0
14.0
52.8
35.2
31.6
32.4
5.2
6.9
1.5
21.2
20.0
22.1
69
40
44
1.3
0.1
2018E
29.2
32.7
146.2
15.4
52.8
32.0
28.5
28.3
4.7
6.4
1.7
20.7
19.8
23.7
69
40
44
1.3
0.1
2019E
36.0
39.8
160.1
19.0
52.8
25.9
23.5
22.4
4.0
5.8
2.0
23.5
22.5
28.7
69
40
44
1.4
0.1
2020E
41.5
45.4
176.1
21.9
52.8
22.5
20.5
19.1
3.5
5.3
2.3
24.7
23.7
30.9
69
40
44
1.4
0.1
Cash Flow Statement
Y/E March
PBT before EO Items
Depreciation
Interest
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO Income
CF from Oper. Incl. EO Items
(Inc)/Dec in FA
Free Cash Flow
Investment & Others
CF from Investments
(Inc)/Dec in Networth
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2013
9,407
473
46
-2,377
(1,562)
5,987
0
5,987
(1,469)
4,518
138
-1,331
998
0
0
-4,195
-147
(3,344)
1,312
2,235
3,547
2014
8,175
528
-432
-2,308
(1,607)
4,356
-746
3,611
(4,678)
-1,068
5,528
850
0
0
-42
-4,216
0
(4,258)
203
662
865
2015
9,374
797
-172
-1,853
(815)
7,331
-1,993
5,338
(3,304)
2,035
2,458
-846
0
0
-45
-4,216
(4,261)
231
568
799
2016
9,104
810
96
-1,561
(2,716)
5,732
0
5,732
(5,500)
232
2,151
-3,349
2,922
0
0
-4,518
0
(1,595)
788
799
1,587
2017E
9,082
848
168
-1,736
498
8,860
0
8,860
(2,446)
6,414
(3,738)
-6,185
(221)
0
0
-4,516
2,508
(2,230)
446
1,587
2,032
2017E
10,123
981
168
-2,036
(1,198)
8,037
0
8,037
(1,500)
6,537
45
-1,455
0
0
0
-4,972
0
(4,972)
1,611
2,032
3,643
(INR Million)
2017E
12,493
1,043
168
-2,513
(2,233)
8,958
0
8,958
(1,500)
7,458
0
-1,500
(0)
0
0
-6,135
0
(6,135)
1,323
3,643
4,966
2017E
14,384
1,106
168
-2,893
(2,370)
10,395
0
10,395
(1,500)
8,895
0
-1,500
0
0
0
-7,064
0
(7,064)
1,830
4,966
6,796
18 July 2017
37

Kirloskar Oil Engines
BSE SENSEX
31,711
S&P CNX
9,827
Capital Goods | Diesel Gensets
Update
| Sector:
Capital Goods
18 July 2017
CMP: INR395
Not Rated
New product launches to drive growth
Providing credible competition in recently-entered HHP segment
Focus on new product launches to expand addressable market:
KOEL has
launched multiple products over the last three years with the intent to expand its
product range and fill up existing gaps in the product portfolio. It now offers an
entire range of high-performance DG sets (2.1kva to 1,010kva). It has launched
high kVA DG sets (750kva and above), power tillers, portable gensets, fire-fighting
pumps, and compact gensets for defense, which are expected to generate 15%
additional sales by FY19. KOEL has laid out its FY18 product launch plan, where it
plans to launch power tillers (5/8/12HP range), railway engines (INR2.3b market)
and electric pumps in the agriculture segment.
Despite being a new entrant, providing credible competition in the HHP segment:
KOEL has recently entered the HHP segment (750kva and above) and initial
response to its products seems encouraging. KOEL's 750kva and above range is
primarily preferred by real estate developers and in government tenders, where
the lowest bidder gets to win the order. To penetrate the market, KOEL has priced
its products very aggressively.
LGM acquisition to increase foothold in electric pump market:
KOEL has signed a
definitive agreement to acquire 76% stake in La-Gajjar Machiniries (LGM) at an EV
of 7.9x FY18 EBITDA, with the intent to acquire the balance stake over the next five
years. LGM is engaged in the manufacture and sale of electric pumps in both
domestic and export markets. It is the market leader in UP and Odisha, and is
among the top-5 in 12 states in India, through its brands ‘Varuna’ and ‘Raindrop’.
Strong balance sheet:
Despite registering a muted 5% PAT growth in FY17, KOEL
reported 22% increase in cash and investments to INR10b. Net working capital
increased marginally from 29 days in FY16 to 35 days. KOEL continues to be a net
cash company, with RoCE of 11.5% in FY17.
Valuation and view
Over the last three years, KOEL has focused on new product development and
launches to expand its addressable market and fill the prevailing product gaps. The
company has completed its product portfolio expansion in the power genset
segment (2.1kva to 1,010kva). KOEL has also acquired a company to expand its
offerings in the electric pump segment. With the above mentioned initiatives, KOEL
is expected to register revenue CAGR of 12% and PAT CAGR of 23% over FY17-19
(Bloomberg consensus). The stock trades at 28/22x its Bloomberg consensus EPS of
INR14/18 for FY18/19. We do not have any rating on the stock.
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
KOEL IN
145
418 / 254
2 / 20/ 73
56.2
0.9
18 July 2017
38

THEMATIC/STRATEGY RESEARCH GALLERY

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40