Capital Goods |
Sector Update | Capex
13 September 2016
Capital Goods
Please refer our
report dated Sep 2016
Private sector capex declines for sixth year in a row
Revival from FY18 as project sanctions by banks surge 92% YoY
Private sector capex at INR1.55t in FY17, down 11% – sixth year of decline:
Private
sector capex has been declining since FY12, when it peaked at INR3.7t. It has
declined to a six-year low of INR1.55t, down 11% in FY17 (Exhibit 1). Interestingly,
capex based on projects sanctioned by banks/FIs (excluding ECBs/equity issuances)
grew 2% to INR1.25t. Key reasons for low private capex include (a) weak end-market
demand, resulting in capacity underutilization, (b) high leverage with companies in
sectors like steel, power, and infrastructure, which constrains new borrowings and
resultant capex, and (c) delays in land acquisition and clearances.
Projects sanctioned (including bank loans, ECBs, and equity issuances) up 53% to
INR2.1t in FY17; sanctions by banks/FIs up 92%:
A total of 922 companies obtained
project sanctions worth INR2.1t (+53% YoY) versus 700 companies with projects
worth INR1.4t in FY16. Interestingly, the projects sanctioned by banks/FIs have risen
92% to INR1.83t in FY17, off a low base in FY16, but the highest since FY13. Project
sanctions from banks/FI peaked at INR4.3t in FY10, leading to a fall in capex
thereafter (Exhibit 2). With a sharp revival seen in sanctions in FY17, we expect
private capex to also start improving from FY18.
Share of Power sector in projects sanctioned dips to 45% in FY17 (57% in FY16);
share of Construction surges to 12% (2% in FY16):
The share of Power sector fell to
45% (primarily renewables, in our view) on a lower share of coal-fired plants.
Construction (12% share v/s 2% in FY16), Roads (7% share; flat YoY), Airports/Ports
(6% share v/s 2.4% in FY16), Water (4% share; flat YoY), Metals (5% share v/s 1% in
FY16), Transport Equipment (4% share v/s 2.5% in FY16) and Textiles (4% share; flat
YoY) together contributed another 41% of projects sanctioned.
Share of greenfield projects surges (79% of sanctions), driven by large-ticket
projects (>INR10b):
The share of sanctions of greenfield projects rose to 79%, the
highest in six years – a higher share of greenfield projects reflects renewed
confidence in companies as regards future demand/utilization. Moreover, we note
that large-sized projects (>INR10b) constitute ~60% of the projects sanctioned (45%
share in FY16 and peak of 80% in FY10). This indicates that big-ticket
greenfield/brownfield expansions are starting to revive.
Valuation and view:
We reiterate our view that private sector capex is bottoming
out and is likely to revive over the next 12-18 months. This is corroborated by the
increase being witnessed in project sanctions data released by the RBI for FY17. Our
top picks in the Industrials sector are L&T (BUY, TP: INR1380), Cummins (BUY, TP:
INR1,180) and Bharat Electronics (BUY, TP: 215).
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
September 2017
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Ankur Sharma – Research Analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449
Amit Shah – Research Analyst
(Amit.Shah@MotilalOswal.com); +91 22 3029 5126
1

Sector Update | Capex
Exhibit 1: Private sector capex dips 11% in FY17 to INR1.55t – 6 year of decline
112%
77%
18%
21%
27%
4%
10%
-1%
-17%
-12%
-15%
-11%
Private sector capex
YoY change(%)
th
-24%
Source: MOSL, RBI
Exhibit 2: Project sanctions from banks/FIs have surged 92% in FY17 – capex will follow
112%
28%
43%
-14%
Projects sancitioned(INRb)
32%
32%
-12%
-49%
YoY(%)
92%
-1%
9%
-35%
-29%
Source: MOSL, Company
Exhibit 3: Projects sanctioned including ECB/equity issuances up 53% to INR2.1t
Total projects planned(INRb)
49%
8%
-18%
24%
1%
-54%
3,467
2,844
4,228
4,559
4,603
2,120
2,634
2,148
-18%
-7%
-32%
YoY(%)
53%
1,459
1,351
2,064
Source: MOSL, Company
Exhibit 4: Share of Power falls in projects sanctioned in FY17; Construction sees a surge (% of total)
Sector
Power
Ports and Airport
Water management
Roads & Bridges
Construction
Metals
Transport Eqt
Textiles
Cement
Chemicals & Pesticides
Others
FY12
42.4
1.3
0.5
-
1.7
16.3
2.6
7.0
2.0
3.5
22.7
FY13
39.4
1.9
-
-
2.8
28.9
0.9
1.9
3.9
1.1
19.2
FY14
35.1
0.8
1.1
1.2
2.1
17.0
1.2
10.3
7.1
1.0
23.1
FY15
42.2
-
0.6
0.3
4.0
17.4
5.3
4.1
3.8
2.6
19.7
FY16
57.2
2.4
4.2
7.6
1.8
1.5
2.5
4.8
1.9
1.6
14.5
FY17
45.1
5.6
3.6
7.2
11.8
4.8
4.3
4.0
2.2
2.1
9.3
Source: RBI, MOSL
September 2017
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Sector Update | Capex
Exhibit 5: Large-ticket projects (>INR10b) at 60% of total in FY17 v/s peak of 80% in FY10
58
44
30
14
5
21
8
11
4
7
4
10 9
8
<1b
48
29
33
28
17
14
5
FY12
15
7
FY13
1-5b
5-10b
46
27
8
2929
20
14
9
1715
12
8
10-50b
>50b
48
39
26
22
6 6
FY16
24
12
42
17
FY09
FY10
FY11
FY14
FY15
FY17
Source: MOSL, Company
Exhibit 6: New/greenfield projects account for 79% of projects sanctioned in FY17
New (%)
65%
41%
71%
Exp & Modernisation (%)
73%
76%
62%
Diversification (%)
75%
Others (%)
79%
31%
20%
17%
0% 3%
FY14
17%
0%
FY15
5%
12%
1% 3%
FY16
18%
1% 2%
FY17
Source: MOSL, RBI
1% 2%
FY11
1% 2%
FY12
0% 1%
FY13
Exhibit 7: Top-6 states account for 60% of projects sanctioned in FY17
11.8
Gujarat
22.7
Andhra Pradesh
Karnataka
Tamil Nadu
8.6
5.5
8.2
6.6
7.4
Uttar Pradesh
Rajasthan
Punjab
Multiple#
Source: RBI, MOSL
Maharashtra
Madhya Pradesh
Telengana
Chhattisgarh
Odisha
Kerala
West Bengal
1.7
2.1
2.6
2.7
3.1
3.6
4.0
4.5
September 2017
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Sector Update | Capex
Exhibit 8: Motilal Oswal coverage universe ratings and valuations
Company
ABB
GE T&D
BHEL
Blue Star
Crompton
CG Consumer
Cummins
L&T
Siemens
Thermax
Havells
Voltas
Bharat Electronics
KEC Internationall.
VA Tech Wabag
Solar Industries
Rating
Sell
Neutral
Sell
Neutral
Neutral
Buy
Buy
Buy
Neutral
Neutral
Neutral
Sell
Buy
Neutral
Buy
Neutral
CMP
INR
1,391
413
134
788
86
222
935
1,214
1,341
891
512
557
198
325
636
900
FY16
15.8
1.3
-2.9
13.0
3.6
1.9
27.2
29.6
17.0
25.1
8.2
11.9
5.4
5.8
16.3
18.1
EPS (INR)
P/E
EV/EBITDA
RoE (%)
FY17 FY18E FY19E FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E FY16 FY17 FY18E FY19E
19.7 22.4 31.6 88.3 70.6 62.1 44.0 40.1 30.9 23.8 18.1 11.1 12.7 12.6 15.8
5.7
9.3 11.3 306.5 72.1 44.5 36.6 122.7 49.4 26.6 21.2 2.8 12.4 21.5 22.7
2.0
4.1
5.6 -46.2 66.7 32.9 23.7 -16.7 27.1 12.6 11.5 -2.1 1.5
3.1
4.1
12.9 17.5 26.1 60.7 61.2 45.0 30.1 18.1 32.5 19.7 14.4 21.5 18.0 21.7 30.1
2.9
3.3
4.0 24.0 29.5 26.1 21.7 11.8 12.4 12.0 11.0 5.2 4.2
6.1
6.3
4.7
5.0
6.4 116.8 47.5 44.1 34.6 65.5 28.0 26.5 21.2 52.1 76.4 49.7 49.7
26.5 27.7 35.0 34.4 35.3 33.8 26.7 33.3 32.5 29.0 22.5 23.7 21.2 19.7 22.8
42.3 46.5 56.2 41.0 28.7 26.1 21.6 24.1 23.3 19.9 16.5 9.7 12.5 12.4 13.8
17.8 22.7 33.0 79.1 75.2 59.0 40.6 46.8 43.5 38.6 27.5 11.8 9.3 10.3 13.7
30.8 30.0 33.2 35.5 28.9 29.7 26.9 23.1 21.0 20.9 18.1 12.4 14.3 12.7 12.8
9.6 10.9 13.8 62.7 53.6 46.8 37.2 40.0 36.2 30.5 23.5 17.3 18.2 18.6 20.7
15.5 16.8 19.1 46.9 36.0 33.2 29.1 42.8 31.5 27.6 23.9 14.8 18.0 15.8 16.0
6.9
7.4
8.2 36.4 28.6 26.8 24.2 21.2 18.1 19.9 18.2 14.5 20.6 17.0 16.8
11.9 13.1 16.4 56.5 27.4 24.9 19.8 15.3 11.6 10.1
8.0 11.3 21.2 19.5 20.9
29.8 34.6 39.8 39.1 21.4 18.4 16.0 15.6 12.4
9.7
8.4 10.1 16.8 17.6 17.4
20.6 24.2 30.0 49.8 43.7 37.2 30.0 27.8 26.1 21.2 17.4 19.9 19.8 19.8 20.9
Source: MOSL
September 2017
4

Sector Update | Capex
NOTES
September 2017
5

Disclosures:
Sector Update
providing Stock
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| Capex
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September 2017
6