Thematic | March 2018
Capital Goods
CEMENT
STEEL
OIL & GAS
FERTILIZERS
TELECOM
Industrial Capex
On recovery path
POWER
Ankur Sharma — Research Analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449
Amit Shah — Research Analyst
(Amit.Shah@MotilalOswal.com); +91 22 3029 5126
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Industrial Capex | On recovery path
Contents: Industrial capex - On recovery path
Industrial capex – On recovery path ..................................................................................... 3
Green shoots of recovery in industrial capex visible ............................................................. 8
Refining capex already in an upswing ................................................................................. 10
Cement – capex seeing pockets of recovery........................................................................ 14
Metals – capex improves on higher commodity prices ....................................................... 15
Power sector capex to remain in a downturn ..................................................................... 17
Infra – capex by corporate sector remains muted ............................................................... 19
Consumer-facing sectors – capex rising steadily ................................................................. 21
Companies .......................................................................................................................... 23
Larsen & Toubro ......................................................................................................... 24
Cummins India ............................................................................................................ 30
Engineers India ........................................................................................................... 34
Thermax...................................................................................................................... 49
ANNEXURE 1. List of companies considered for the analysis ............................................... 61
March 2018
2

Industrial Capex | On recovery path
Capital Goods
Industrial capex – On recovery path
Oil & Gas, Steel and Cement capex to drive revival over FY17-21
After a decline over FY12-17, green shoots of recovery are visible in industrial capex.
We expect Oil & Gas, Cement and Steel capex to be the key drivers of this recovery
over FY17-21.
Capex growth in consumer-oriented sectors (Auto, FMCG, Consumer Durables) would
remain steady during FY17-21; Pharma could see a decline on sector headwinds.
Our top picks to play the industrial capex recovery are Engineers India (BUY; TP:
INR200), Thermax (BUY; TP: INR1,350), L&T (BUY; TP: INR1,670), and Cummins India
(BUY; TP: INR1,040).
We have done a deep dive into the capex plans of the companies constituting the
BSE 200 index (representative of the industrial capex cycle in India, in our view) over
the period 1995-2021. Our key findings:
Green shoots of recovery in industrial capex visible
Industrial capex in India has been subdued over the past 5-6 years, as reflected in
the weak capex spends of Indian companies, corroborated by weak orders for
equipment suppliers and muted industrial credit growth. However, capex by
consumer-oriented sectors like Autos, Telecom, Media, FMCG, Food & Beverages
and Consumer Durables/Electronics has continued largely uninterrupted. Post the
cyclical downturn in the core sectors, we are starting to see green shoots of
recovery in sectors like Oil & Gas (O&G), Steel, Cement, and Fertilizers, which should
strengthen hereon. Private sector capex in the Power sector will be towards
renewables; a revival is unlikely in coal-fired plants.
Capital Goods
Industrial capex -
On recovery path
Oil & Gas capex driven by BS-VI emission upgrade, and expansion in
Refining, Petrochemicals and Fertilizers
Capex in the O&G space is being driven by BS-VI emission norm-related upgrades
(INR300b spend) along with brownfield/greenfield refinery expansions by state-
owned oil marketing companies. Additionally, five fertilizer plants are also being
revived, providing further capex opportunities in this space. We estimate total O&G
capex over FY17-21 at INR2.2t (8% CAGR ex Reliance and ONGC). Ordering in the
Ankur Sharma
sector has begun – Engineers India is already sitting on a multi-year high backlog;
Ankur.vsharma@MotilalOswal.com
equipment suppliers and EPC contractors (Thermax, L&T, ABB, and Siemens) should
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benefit over the next few quarters.
March 2018
3

Industrial Capex | On recovery path
Sector-wise capex growth (FY04-
21E)
Sector
Auto
Cap Goods
Cement
FMCG
Infra
TMT
Metals
Oil & Gas
O& G (Ex RIL
and ONGC)
Pharma
Power
Others
FY04-
12
35%
50%
46%
25%
61%
50%
38%
25%
1%
30%
30%
33%
FY12
-17
6%
-8%
-7%
2%
-30%
21%
-11%
19%
3%
24%
-3%
0%
FY17-
21E
5%
Cement sector capex primarily in East India; waste heat recovery
generators (WHRGs) also being deployed
Region-wise, utilization has already crossed 80% in North and East India, and is at
~75% in West India and ~55% in South India. Capacity addition is primarily being
3%
planned by companies in East India due to strong demand (growing at ~12% YoY).
9%
Among the listed companies, UltraTech, Dalmia Bharat and Shree Cement are
-2%
adding capacities. JSW Cement, an unlisted player, is looking to add ~8mtpa of
0%
capacity. Most cement players are evaluating WHRGs to reduce electricity
-15%
consumption. We estimate cement capex to grow at a CAGR of 9% over FY17-21.
7%
-6%
8%
-6%
-8%
-2%
Steel capex revival driven by cash-rich companies
With rising commodity prices and protection of import tariffs, Metals companies are
announcing capacity additions (FY17-21E capex CAGR growth of 7%). Tata Steel and
JSW Steel have already started work on their respective plants. However, quite a
few steel players like Bhushan Steel, Monnet Ispat, Essar Steel, Electrosteel remain
under stress and their assets are in the process of being sold by their lenders under
the Insolvency and Bankruptcy (IBC) code. In our view, a full-fledged revival in the
sector’s capex would happen only after these assets are sold and existing capacities
are fully utilized.
Power sector capex muted for coal-fired plants; emission control
equipment an INR1.3t opportunity over CY18-22
Capex in the Power sector has largely shifted towards renewables at the cost of
coal-fired plants; this is especially true for private sector capex in Power. We do not
expect any revival in coal-fired capex in the medium term (FY17-21E: -8% CAGR) and
expect the share of renewables to continue to rise – India has committed to raising
the share of renewables to 40% of total energy mix by 2030.
Consumer-oriented sectors continue steady capex
Sectors like Autos, FMCG, Consumer Durables/Electronics, F&B continue to add
capacity given strong end market demand. However, pharma capex would be muted
over FY17-21, driven by the deterioration in business environment for the sector.
Valuation and view
Our preferred plays for an industrial capex recovery are
Thermax
(Upgrade to BUY;
TP: INR1,350),
Engineers India
(Initiate with BUY; TP: INR200),
Cummins India
(BUY;
TP: INR1,040) and
L&T
(BUY; TP: INR1,670). Engineers India is a pure play on the
refining/petrochemicals capex revival and a preferred supplier for OMCs in India. It
has already bagged the bulk of the orders relating to BS-VI emission norms and will
likely retain a majority of the PMC orders for upcoming refineries. Thermax, L&T and
Cummins are our preferred plays on overall industrial capex revival with their
diversified offerings across segments in Steel, Cement, consumer-facing sectors and
Refining. Key risks to our ratings: (a) sharp downturn in key end markets, and (b)
sharply higher competition, especially from Chinese players.
March 2018
4

Industrial Capex | On recovery path
STORY IN CHARTS
Phases of capex over FY95-21E
Phase 2
Government
announced fiscal sops
to manufacturers for
investments. The
Supreme Court’s long-
awaited decision on
upgrading auto fuels
(April 1999) led to a
round of capex of
INR120b by refineries
to produce Euro-I
compliant fuel. Start
of NELP (February
1999) boosted capex
by O&G companies.
Capex by Power PSUs,
NTPC and PGCIL grew
at 12% CAGR during
this period.
Phase 4
Policy paralysis,
lack of fuel and
weak demand hurt
capex in core
sectors during
FY11-14.
Consumption-
oriented sectors
continued to spend
on capacity
expansion, while
Infrastructure
capex picked up
from FY15 on
government
spending on Rail,
Road, Defense,
Water, and Urban
Infrastructure.
Phase 1
Rising rates led to
slowdown in capex.
Phase 3
Reforms rekindled
investments in
Power sector, with
CPSUs followed by
SEBs, and then, IPPs
coming to set up
power plants. Steel,
Cement,
Highways/Road
capex too kicked in
at the same time.
Phase 5
We expect a pickup
in Refining,
Fertilizers, Cement
and Metals/Steel.
Sector-wise capex over FY97-21E (b)
Auto
Cap goods
Cement
FMCG
TMT
Metals
Oil & Gas
Pharma
Power
Others
March 2018
5

Industrial Capex | On recovery path
STORY IN CHARTS
Sector-wise capex growth (FY04-21E)
Refining sector capacity addition and utilization
Incremental capacity (Mn ton)
Utilisation(%)
Steel sector capacity addition and utilization
Capacity Addittion m tons
81 75
102
91 92 94 86 88 90
81
80 82 81 84 82
Capacity Utilisation(%)
72 74 76
68
80 84
72 73 70
Source: Company, MOSL
Source: Company, MOSL
Cement sector capacity addition and utilization
Capacity Addittion (m tons)
Utilisation (%)
Industrial credit growth starting to pick up
40%
30%
20%
10%
0%
-10%
35%
2.1%
-5%
Source: MOSL, Company
Source: MOSL, Company
March 2018
6

Industrial Capex | On recovery path
Industrial capex – On the recovery path
Cement sector capex
primarily in East India;
Waste Heat Recovery
Generators (WHRG) also
being deployed
Steel capex revival driven
by companies with cash-
rich balance sheets
Oil & Gas capex driven
by BS-VI emission
upgrade, and
expansion in Refining,
Petrochemicals and
Fertilizers
Power sector capex
muted for coal-fired
plants; emission
control equipment an
INR1.3t opportunity
over CY18-22E
Green shoots of
recovery in
industrial capex
visible
Consumer-oriented
sectors continue
steady capex
March 2018
7

Industrial Capex | On recovery path
Green shoots of recovery in industrial capex visible
Refining, Cement and Metals to witness growth
Industrial capex in India has been subdued over the past 5-6 years as reflected in the
weak capex plans by the Indian corporate sector, corroborated by weak orders for
equipment suppliers and muted industrial credit growth over the same period.
We are starting to see the first green shoots of recovery in industrial capex: (a)
positive turn in industrial credit since December 2017, (b) pickup from the industrial
sector for Capital Goods companies, and (c) announcements of new capex plans in
core sectors like Refining, Cement, Steel, and Fertilizers.
Exhibit 1:
Industry credit growth muted over last five years
40%
30%
20%
10%
0%
-10%
35%
2.1%
Source: RBI
Brief history and outlook of corporate capex in India over FY95-21
We break the period FY95-21E into five phases for our analysis (see table below)
based on the cyclical upturn/downturn seen in capex.
Exhibit 2:
Phases of capex over FY95-21E
Phase
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
Commentary
Rising rates led to slowdown in capex.
Government announced fiscal sops to manufacturers for investments. The Supreme Court’s long-awaited
decision on upgrading auto fuels (April 1999) led to a round of capex of INR120b by refineries to produce Euro-I
1997-2004
compliant fuel. Start of NELP (February 1999) boosted capex by O&G companies. Capex by Power PSUs, NTPC
and PGCIL grew at 12% CAGR during this period.
Reforms rekindled investments in Power sector, with CPSUs followed by SEBs, and then, IPPs coming to set up
FY04-12
power plants. Steel, Cement, Highways/Road capex too kicked in at the same time.
Policy paralysis, lack of fuel and weak demand hurt capex in core sectors during FY11-14. Consumption-oriented
FY12-17
sectors continued to spend on capacity expansion, while Infrastructure capex picked up from FY15 on
government spending on Rail, Road, Defense, Water, and Urban Infrastructure.
FY17-21
We expect a pickup in Refining, Fertilizers, Cement and Metals/Steel.
Source: MOSL, Industry
Period
1995-96
Phase-1:
1995-96 was a period of high interest rates (FD rates at 12-14%) and
this kept corporate capex muted.
Phase-2:
The government announced fiscal sops to manufacturers for
investments. Refineries began capex during 1999-2003 post the Supreme Court
ruling on sale of BS-1 fuel in April 1999. Start of NELP (February 1999) boosted
capex by O&G companies, as new blocks were offered for exploration on
auction basis to private and public companies. There was strong capex by Power
PSUs, NTPC and PGCIL – CAGR of 12%.
March 2018
8

Industrial Capex | On recovery path
Phase-3:
During FY04-12, corporate capex witnessed its
Golden Period,
buoyed
by strong domestic economic recovery, supported by sharp increases in
commodity prices. Significant capex was seen across Power, Refining, Roads,
Steel, and Cement.
Phase-4:
During FY12-17, policy paralysis, lack of fuel and weak demand hurt
capex in core sectors. Consumption-oriented sectors continued to expand
capacities. Infrastructure capex picked up from FY15 on government spending.
Phase-5:
Over FY17-21, we see capex picking up in Refining, Fertilizers, Cement
and Metals, as end-market demand revives and capacity utilization rises.
Exhibit 3:
BSE-200 constituents – bottoms-up capex analysis FY96-21E (INR B)
Auto
Cap goods
Cement
FMCG
Infra
TMT
Metals
Oil & Gas
Pharma
Power
Others
4,000
3,000
2,000
1,000
0
Source: MOSL, Company
Exhibit 4:
Split of overall capex into different sectors
Auto
100%
80%
60%
40%
20%
0%
Cap Goods
Cement
FMCG
Infra
TMT
Metals
O&G
Pharma
Power
Others
Source: MOSL, Company
Exhibit 5:
Sector-wise capex growth (FY97-21E) – Steel, Cement, Refining drive revival
Sector
Auto
Cap Goods
Cement
FMCG
Infra
TMT
Metals
Oil & Gas
--Oil & Gas (Ex RIL and ONGC)
Pharma
Power
Others
FY97-04
8%
24%
14%
16%
34%
16%
7%
11%
12%
19%
16%
37%
FY04-12
35%
50%
46%
25%
61%
50%
38%
25%
1%
30%
30%
33%
FY12-17
FY17-21E
6%
5%
-8%
3%
-7%
9%
2%
-2%
-30%
0%
21%
-15%
-11%
7%
19%
-6%
3%
8%
24%
-6%
-3%
-8%
0%
-2%
Source: Company, MOSL
March 2018
9

Industrial Capex | On recovery path
Refining capex already in an upswing
BS-VI upgrades, greenfield/brownfield expansions driving capex
Capex in the O&G space is being driven by upgrades related to BS-VI emission norms
(INR300b spend) and brownfield/greenfield refinery and petrochemical expansions
by various state-owned companies. Additionally, a few fertilizer plants are also
expected to be revived, providing further opportunities in this space. We estimate
total O&G capex over FY17-21 at INR2.2t.
The overall O&G capex (for the list of companies covered) had witnessed a big bump
in FY14 and again in FY16/17 and this is primarily due to commissioning of Reliance
Industries projects. Reliance has been on an expansion phase over the last few years
and with projects getting commissioned over FY14-18 (average annual capex of
INR621b), there would be a sharp dip from FY19 (INR250b annually). Sector capex is
likely to decline to INR1.05t in FY19 from INR1.5t in FY18 (see exhibit below). We
note that Reliance Industries prefers placing orders with foreign contractors. Going
forward, capex in the sector is likely to be driven by state-owned entities.
Exhibit 6:
Oil & Gas sector capex over FY96-21E
O&G
Source: MOSL, Company
Exhibit 7:
Oil & Gas sector capex (ex-Reliance and ONGC)
O&G capex ex Reliance
504
379
316
336
324
503
496
514
504
628
Source: MOSL, Company
Ordering in the sector has begun – Engineers India is already sitting on a multi-year
high backlog; equipment suppliers and EPC contractors should benefit over the next
few quarters.
March 2018
10

Industrial Capex | On recovery path
Exhibit 8:
Refining capacity addition and utilization
Incremental capacity (Mn ton)
98
74
87
91
92
92
96
94
94
101
88
102 102
96
89
Utilisation(%)
103 103 100 103 102 104 106 107
43
2
0
4
9
-
5
17
-
29
7
8
20
4
-
-
16
7
9
-
-
-
Source: Company, MOSL
Exhibit 9:
Growth in refining capacity has slowed down over FY12-17
13%
Growth in capacity(CAGR YoY%)
7%
2%
1%
2017-2021
Source: Company, MOSL
1997-2004
2004-2012
2012-2017
Large capex plans announced by oil marketing majors
All the major oil marketing majors have announced very large capex plans over the
next 5-7 years. We highlight these below:
Indian Oil Corporation:
IOCL has plans to almost double capacity to 150MT by
investing ~INR1.8t over the next 5-7 years. It would incur INR500b on refining
(including INR110b for fuel upgradataion), INR300b on petrochemicals, and
INR220b on pipelines.
Hindustan Petroleum:
HPCL is looking to increase its refining capacity, which
has lagged its marketing capacity. Key refinery expansions include Mumbai,
Vizag and Barmer (includes petchem as well).
Bharat Petroleum:
BPCL is looking to expand capacity from 31MT to 50MT by
FY22. Some of the key refinery expansions being planned are Kochi, Bina,
Mumbai, and Numaligarh (Assam).
In addition to the individual refinery capex planned by the three large oil majors, a
mega West Coast Refinery is also planned to be built in Maharastra (phase-1:
40mmtpa; phase-2: 20mmtpa). The total capex on this refinery is expected to be
INR1.5t. Land acquisition is currently ongoing for this project.
March 2018
11

Industrial Capex | On recovery path
Exhibit 10:
IOCL plans to raise capacity from 80.7mmtpa to 150mmtpa by 2030
Description
Total capex in seven years
REFINING
6mmtpa @ Gujarat/Koyali to 18mmtpa
5mmtpa @ Panipat to 20.2mmtpa
3mmtpa @ Barauni
Indmax @ Bongaigaon
5mmtpa @ Paradip expansion
Fuel up gradation
Debottlenecking etc.
Marketing infrastructure
LPG cylinders/bottling plants
Terminals/Depots
Retails outlets- new and automation
Misc
PETROCHEMICALS
PP @ Paradip
C2, C3, C4, C5 @ Panipat
PX/PTA expansion @ Panipat
Acrylics @ Gujarat
PX-PTA @ Paradip
MEG @ Paradip
Misc
PIPELINES
Paradip-Hyderabad
Paradip-Raipur-Ranchi
Others- upgradation of existing networks, spur lines, extensions
E&P (M&As mainly)
Miscellaneous
INR b
1,750
500
110
80
60
25
110
115
400
235
85
45
35
300
30
65
20
40
77
37
31
220
23
18
179
300
30
Source: Company, MOSL
Exhibit 11:
HPCL’s capex plans over the next 3-5 years
Description
Total
Refining
Mumbai expansion (6.5mmtpa to 9.5mmtpa)
Fuel upgradataion
Vizag expansion from 8.3mmtpa to 15mmtpa
HMEL from 9mmtpa to 11.3mmtpa
Barmer, Rajasthan
Marketing And Pipeline
Palanpur-Vadodara
VVSPL Phase II (Vizag)
LPG bottling etc
Others
Renewables
R&D
Others
INR b
958
674
42
208
24
400
262
19
30
159
54
10
5
7
Source: Company, MOSL
March 2018
12

Industrial Capex | On recovery path
Exhibit 12:
BPCL’s capex plans over the next 3-5 years
Description
Total
Refining
Kochi IREP/petchem/Euro-VI
Bina expansion to 15mmtpa
Mumbai expansion
Numaligarh Refinery
E&P
Marketing
Depot/terminals/Ros
INR b
1,200
750
210
200
140
200
250
200
200
Source: MOSL, Company
Exhibit 13:
Refineries planned in India over the next 5-7 years
Name of company
BPCL
BPCL
BPCL
BPCL
BPCL
HPCL
HPCL
HPCL
HPCL
HPCL - GAIL
IOC/ Chennai Petroleum
IOC
IOC
IOC
IOC
IOC
IOC
IOC/EIL/HPCL/BPCL
Euro VI upgradataion
Total
Location
Value (INR B) Expansion (mmtpa)
Bina Ph 2
200
8 to 15
Numaligarh Refinery
100
8-9
Kochi Refinery Expansion
150
9.5 to 15.5
Kochi Petrochemical
45
1.5
Mumbai
12 to 14
Bhatinda expansion
22
1
Vizag
200
7 to 15
Barmer
430
0 to 9
Mumbai Expansion
39
7.5 to 9.5m
Kakinada green field petrochemicals
400
1
Nagapatnam
275
9
Koyali, Gujarat
60
13.5 to 18
Mathura
75
8 to 11
Panipat
180
15 to 25
Barauni
75
6 to 9
Paradip
125
15 to 20
Haldia
13
7.5 to 8
Maharastra (West Coast Refinery)
1,500
40+20
Pan India
300
4,189
Source: Company, MOSL
Another five fertilizer plants are being considered by the government for revival.
Orders for the fertilizer plant in Ramagundem in Telengana have already been
placed in FY14-15.
Exhibit 14:
Fertilizer plants being revived
Name of location & state where plant is located
Talcher, Odisha
Ramagundam, Telangana
Gorakhpur, Uttar Pradesh
Sindri, Jharkhand
Barauni, Bihar
Capacity(mtpa)
1.3
1.3
1.3
1.3
1.3
Date of operationalization
Dec-20
Nov-18
Aug-20
Sep-20
Oct-20
Source: PIB, MOSL
March 2018
13

Industrial Capex | On recovery path
Cement – capex seeing pockets of recovery
Increasing utilization and cash rich balance sheet drive a revival
Capex for cement plants has already begun in select pockets where utilization levels
have/are reaching >80% and new capacity would be needed over the next few
years. Another area of capex is waste heat recovery generators (WHRGs), which
help to reduce electricity consumption via captive power generation. Shree Cement
has emerged as one of the lowest cost cement producers via installation of WHRGs
across its plants and this is being followed by most other plants.
Region-wise, utilization has already crossed 80% in North and East India, and is at
~75% in West India and ~55% in South India. Capacity addition is primarily being
planned by companies in East India due to strong demand (growing at ~12% YoY).
Among the listed companies, UltraTech, Dalmia Bharat and Shree Cement are
adding capacities. JSW Cement, an unlisted player, is looking to add ~8mtpa of
capacity at a capex of INR50b over the next few years.
Exhibit 15:
Cement sector capex (FY96-21E)
Cement capex (INR b)
112
66
21
10 15 14
8
21 21 16
9 15 17
95
105
66 72
131
104111
79
66
87 82 93 91
Source: MOSL, Company
Exhibit 16:
Cement sector capacity addition and utilization over FY97-21E
86
Capacity Addittion (m tons)
94
90
84
79 81 82
94
Utilisation (%)
88
83
76
76
81
81
78
81
68
69
69
66
63
65
68
71
74
8
8
8
4
-
29
5
5
7
1
6
25
27
41
36
12
36
21
17
18
15
16
14
20
15
Source: MOSL, Company
Exhibit 17:
Growth in cement capacity to be driven by increasing utilization
Growth in cement capacity (CAGR YoY %)
8%
7%
4%
7%
1997-2004
2004-2012
2012-17
20117-21
Source: Company, MOSL
March 2018
14

Industrial Capex | On recovery path
Metals – capex improves on higher commodity prices
Tata Steel, JSW Steel take the lead
With rising commodity prices and protection of import tariffs, profitability and cash
flows of domestic steel companies have improved. However, quite a few steel
players like Bhushan Steel, Monnet Ispat, Essar Steel, Electrosteel remain under
stress and their assets are in the process of being sold by their lenders under the
Insolvency and Bankruptcy (IBC) code. In our view, a full-fledged revival in the
sector’s capex would happen only after these assets are sold and existing capacities
are fully utilized.
Exhibit 18:
Metals sector capex (FY96-21E)
Metals capex (INRb)
631
382
276
64 60 68 69
58 59 58
10 34
134159
185
423
499
720
640
499
391
343
423413428447
Source: Company, MOSL
Within the steel sector, incremental capex is being planned only by Tata Steel and
JSW Steel that have the balance sheets to support capex. Quite a few companies in
the steel sector are currently in the National Company Law Tribunal (NCLT) process,
with bankers looking at selling off assets to recover their dues.
Exhibit 19:
Steel capacity expansion over the next few years
Name of company
JSW Steel
Dolvi
Vijaynagar
Paradip
TATA Steel
Kalinganagar Expansion
Capacity m
5 to 10m ton
3 to 4.5m ton
12m
3 to 8mn ton
Value(INR b)
268
550
235
Source: MOSL, Company
March 2018
15

Industrial Capex | On recovery path
Exhibit 20:
Steel sector capacity addition and utilization over FY98-21E
Capacity Addittion m tons
102
81
75
80
82
81
84
82
91
92
94
86
81
88
90
72
73
70
68
72
74
76
Capacity Utilisation(%)
80
84
1
0
0
2
1
1
4
4
8
6
3
6
9
3
6
13
5
7
2
7
7
5
3
5
Source: MOSL, Company
Exhibit 21:
Growth in steel capacities by companies with cash-rich balance sheets
Growth in steel capacity (CAGR YoY %)
10%
6%
4%
4%
1997-2004
2004-2012
2012-2017
2017-2021
Source: MOSL, Company
Resolution of NCLT cases could accelerate capex in the sector
Our Metals team believes that the acquisition of some of the larger steel companies
referred under the Insolvency and Bankruptcy code to the NCLT could accelerate
steel sector capex – the acquirer would look at ramping up production by increasing
capacity and/or completing unfinished plants. Some of the large steel companies
referred under the IBC are:
Bhushan Steel
Essar Steel
Monnet Ispat
Electrosteel steel
Uttam Galva
Visa Steel
Exhibit 22:
Likely impact of resolution of NCLT cases
Acquisition
Essar Steel
Bhushan Steel
Monnet Ispat
Acquirer
Arcelor Mittal
TATA Steel
JSW Steel
Comments
From current 6m ton will look to aggressively expand to 14m
Would look to increase capex to improve utilization
Would look to expand capacity here
Source: MOSL, Industry
March 2018
16

Industrial Capex | On recovery path
Power sector capex to remain in a downturn
Emission control equipment the new opportunity
Power sector capex has been slowing down over the last few years and we do not
expect a meaningful revival over the medium term due to the following:
Capacity utilization of private sector power plants remains low, as demand from
the industrial sector is still low and discoms are still looking at power cuts to
save on losses.
Several power projects are besieged with issues relating to funding, fuel and
clearances
~20GW of stranded power plants which need to be sold by lenders
Shift to renewables implies low interest in setting up of coal fired plants
Weak financial position of discoms implies payment risk for utilities is still very
high.
The slowdown in inter-state transmission capex has resulted in a flattening out
of PGCIL capex. States would now need to spend to upgrade their intra-state
transmission network to 220/400kva levels.
Power sector capex peaked out in FY12 and is unlikely to reach the same levels in
the medium term, as end demand remains weak (weak financial position of
discoms) while utilization continues to be weak (~70% for coal-fired plants). Capex
by the key CPSUs, namely NTPC, NHPC and PGCIL too appears to have peaked and is
set to flatten/decline over FY18-21 on falling capex in coal-fired plants by NTPC and
lower spends on inter-state transmission.
Exhibit 23:
Power sector (generation + transmission) capex (FY96-21E)
Power Capex(INRb)
Source: MOSL, BSE 200
Exhibit 24:
Power BTG orders over FY02-18E
36,516
30,891
26,145
13,585
3,763 3,539
5,688
7,498 6,563
14,095
14,500
8,570
6,533
10,785
5,620
6,640
1,980
Source: MOSL, Industry
March 2018
17

Industrial Capex | On recovery path
Emission control equipment – a big opportunity for equipment suppliers
The only area of capex in the coal-fired sector is likely to be emission control
equipment (FGD/SCR) for SOX/NOX – we estimate the total opportunity at INR1.3t
over the next five years to December 2022.
Ordering for emission control equipment to finally start from CY18; December
2022 the revised deadline:
The MOEF had notified new emission norms for air
and water in December 2015, with a two-year timeline for implementation.
While very little progress in the past two years, the CEA has worked out an
implementation plan by December 2022 based on discussions with individual
power plants. The emission control implementation plan submitted by the CEA
to the Minister of Environment and Forest has been accepted and Central
Pollution Control Board (CPCB) has already issued notices to ~131GW power
plants in December 2017 (India’s coal-fired capacity at ~192GW) to comply with
these emission norms as per the implementation plan (December 2018 to
December 2022) submitted to the CEA. In our view, utilities were delaying
orders, as they awaited (a) revised timelines to be frozen before going ahead
with placing orders, (b) compensation for shutdown of boilers while retrofitting,
especially in case of SCR implementation, and (c) change in PPAs to reflect
higher costs from retrofitting. With these uncertainties behind, we expect
orders to pick up significantly over the next 2 -3 years, as 2-2.5 years would be
required for these projects to be executed to meet the implementation deadline
of December 2022. ~40GW of plants have already been tendered for FGD
installation, with ~32GW of tenders by NTPC alone.
INR1.3t opportunity for emission control equipment providers:
We delved into
the potential opportunity from the emission norms over the next few years by
analyzing the implementation plan for ~192GW of India’s existing coal-fired
capacity. We estimate an opportunity of INR1.3t totaling 196GW from the
retrofit of existing power plants (165GW) alongside the new plants (30GW) to
be commissioned over the 13
th
plan (FY22). In case of existing plants, we have
used the list of plants (~166GW) that have agreed to the implementation
timeline with the CEA by December 2022. The capex is estimated at INR8.8m-
12.8m/MW by the Central Electricity Authority for meeting the new air (SPM,
SOX, and NOX) and water consumption norms. In our view, the spending on
water consumption may not be material and have only considered the spend on
SOX, SPM and NOX control equipment. ~INR4m is the estimate for the
desulphurization unit (SOX control), and depending on technology, INR1m-
4m/MW for selective catalytic reduction (SCR) for nitrogen emissions. The CEA
estimates the tariff impact of ESP, SOX, NOX and closed water circulation at
INR0.62-0.93/unit, which will be passed on via modifications to the existing PPAs
of utilities. Of this, the cost for implementation of the FGD is INR0.20 and
INR0.09-0.30 for SCR.
March 2018
18

Industrial Capex | On recovery path
Infra – capex by corporate sector remains muted
Capex spend to be driven by the government
Quite a few private infrastructure players that had taken on infrastructure projects
(Roads, Ports, and Power) on BOT basis have suffered over the last few years due to
various reasons including:
Aggressive bids, which failed to materialize on project commissioning
Economic slowdown hurting projected sales/revenues
Rise in interest costs hurting project economics
Failure to get clearances / land on time for the projects
Lack of funding to complete the projects
Lack of fuel supply for coal/gas-fired plants
Several such projects are currently facing a financial crunch on account of leveraged
balance sheets and have either been put on sale or being referred to the bankruptcy
courts for resolution. We do not expect a revival till these assets are sold to new
buyers and balance sheets are corrected.
Exhibit 25:
Infrastructure capex by the corporate sector to remain weak
Infra capex (INRb)
1,022
3
3
3
3
8
60
6 10 47 34 47
141 161
265 274
389
459
247
181 169 147
89 112 128 126
Source: MOSL, Company
Government spending to continue to drive capex
In the absence of the private sector to fund infrastructure projects, the onus is on
the government to fund such projects. Since the time it came into power in May
2014, the NDA government has been focused on increasing infrastructure spending
to pump prime the economy and this is visible in the sharp increase in spending on
Rail, Road, and Defense among others.
March 2018
19

Industrial Capex | On recovery path
Exhibit 26:
Road capex (FY13-19E)
INRb
152%
YoY(%)
36%
-35%
211
FY13
287
FY14
0%
57%
-3%
10%
287
FY15
723
FY16
1,134
FY17
1,101
FY18
1,214
FY19BE
Source: Budget, MOSL
Exhibit 27:
Rail capex (FY13-19BE)
INRb
52%
5%
5%
24%
24%
1%
22%
YoY(%)
493
FY13
520
FY14
643
FY15
975
FY16
1,208
FY17
1,218
FY18
1,485
FY19BE
Source: Budget, MOSL
Capital Goods sector capex muted on under-utilized capacity
Capacity utilization of the Capital Goods sector peaked out in FY12-13 and has
remained underutilized over the past 5-6 years, given the weak industrial capex
scenario. While the capacity utilization for companies exposed to the transmission
sector has been relatively stronger, companies with dominant exposure to industrial
capex and coal-fired power generation have suffered, with most end-customers
shifting to opex and few/far-in-between brownfield expansions being planned.
With a likely revival in industrial capex over the next few years, we expect capacity
utilization for these companies to improve, but we do not expect any meaningful
increase in capex in the short to medium term.
Exhibit 28:
Capital Goods sector capex (FY96-21E)
Cap Goods capex(INR b)
89
75
41
50
62
42
65
60
56
55 57
51
68 64 64
31
7
7
6
5
3
3
10
18
6
16
Source: MOSL, Company
March 2018
20

Industrial Capex | On recovery path
Consumer-facing sectors – capex rising steadily
Auto, FMCG, Telecom, Media continue to spend; Pharma takes a pause
Despite the downturn in the core sectors over the past 5-6 years, spending by the
consumer-oriented sectors has continued, driven by rising demand and increasing capacity
utilization. Of course, this has not been enough to offset the fall in capex in the core
sectors of the economy and is reflective of the falling orders and industrial credit growth
for the corporate lenders. In this section, we look at the capex trends in each of the
consumer-facing sectors.
Automotive sector – cyclical demand upturn continues
Capex by the automotive sector has primarily been on:
Product development,
R&D,
Marketing infrastructure and
Maintenance/productivity improvement which is expected to continue over the
next three years as well to FY21E.
Exhibit 29:
Automotive and ancillary capex (FY96-21E)
Auto capex (INR b)
158
117
40
27 22 24 24 24 16 22
12 22
69
121
91
161
145
167
188
153
203
228239233
242
136
Source: MOSL, Company
Telecom and Media – capex likely to decline
Capex in these sectors is largely accounted for by the two listed Telecom companies
– Bharti Airtel and Idea Cellular. Their spend has primarily been on acquisition of
spectrum and on network expansion. Our Telecom analyst believes that capex in the
sector has peaked in FY17. Bharti and Idea together incurred capex of INR510b
against INR548b spent by the Telecom and Media universe. With spectrum
payments behind, overall sector capex is likely to decline over the next few years.
Exhibit 30:
Capex by the Telecom and Media sectors (FY96-21E)
TMT capex (INR b)
Source: Company, MOSL
March 2018
21

Industrial Capex | On recovery path
Pharma – deteriorating business environment warrants squeeze on capex
The Pharma sector has seen its capex peak out in FY17. Our Pharma analyst lists the
following reasons for his belief that capex is likely to decline over the next few years:
Over the past 2-3 years, companies have expanded capacity anticipating
continued increase in domestic/overseas demand. However, the sector has
been besieged with problems in the last one year, leading to a squeeze in capex.
Capex was front-ended by companies to take advantage of excise benefits in
Assam, which led to a sharp increase in FY16-17; capex will now start heading
lower.
Focus is on asset sweating and improving productivity at the existing plants
rather than on setting up new plants.
Exhibit 31:
Pharma sector capex (FY96-21E)
Pharma sector capex(INRb)
170
128136
71
8
4
5
1
20 20 12
4 11
32
90
57 60
48 48
72 73
191
148139145145
Source: MOSL, Company
FMCG sector – steady capex continues
Capex by the FMCG sector has been fairly steady over the last 5-6 years. Capacities
were added to cater to increasing demand from consumers. Unlike the core sectors,
where capex peaked out in FY12/13, the FMCG sector has seen steady capex – it was
relatively unaffected by the sharp slowdown in core sector spending.
Exhibit 32:
FMCG sector capex (FY96-21E)
FMCG capex (INRb)
71
66
73
50
77 77
71 72 71 73 70
70 71 71
63
42
15 11
15
6 10 10
21
11
16
25
Source: MOSL, Company
March 2018
22

Industrial Capex | On recovery path
Companies
BSE Sensex: 32,597
S&P CNX:
9,998
March 2018
Companies
March 2018
23

26 March 2018
Update
| Sector:
Capital Goods
C
BSE SENSEX
32,597
S&P CNX
9,998
Larsen & Toubro
CMP: INR1,268
TP: INR1,670(+32%)
Buy
Play on pickup in domestic infrastructure capex
Well prepared, with requisite execution setup in place
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 (%)
LT IN
1,399.4
1470 / 1014
2/6/14
1,812.3
27.8
3265.0
100.0
Pickup in domestic E&C execution to drive 10% revenue CAGR over FY17-
20
A pickup in domestic E&C execution should drive revenue CAGR of 10% over FY17-
20. Domestic execution had been impacted over the last few years on account of
delay in customer approval for work-front availability as well as payment delays
faced by LT, which led to subdued growth over FY14-17. Post GST implementation,
domestic E&C projects have started showing traction, registering 11% growth in
9MFY18. Execution momentum is expected to remain healthy, as large
infrastructure projects won over the last 2-3 years are expected to contribute
meaningfully in FY19/20, which would ensure 11% CAGR in E&C revenue over
FY17-20.
Financials Snapshot (INR b)
Y/E MAR
2018E 2019E
Sales
1,202 1,356
EBITDA
132.6 161.1
Adj PAT *
68.0
80.8
EPS (INR)*
48.6
57.8
EPS Gr. (%)
14.9
18.9
BV/Sh (INR)
391.3 430.6
RoE (%)
13.0
14.1
RoCE (%)
8.3
9.9
P/E (x)*
26.1
21.9
P/BV (x)
3.5
3.2
*Consolidated
2020E
1,476
176.0
97.4
69.6
20.4
478.9
15.3
10.4
18.2
2.9
Finalization of orders in defense and infrastructure to drive order inflow
momentum
Post 1HFY18, the LT management had scaled down its order inflow guidance to
zero to marginally positive from 12-14% growth earlier. However, awarding activity
has picked up significantly post GST implementation and order inflow for 9MFY18
grew 6% YoY. We have built in order inflow growth of 5% for FY18. Over FY17-20,
we expect 10% CAGR in order inflow, led by finalization of large ticket orders in the
defense (LPD/Corvette) and infrastructure segments (Roads, Airport, Metro)
Shareholding pattern (%)
Dec-17 Sep-17 Dec-16
As On
Promoter
0.0
0.0
0.0
DII
40.1
39.5
39.3
FII
18.5
18.8
18.4
Others
41.4
41.7
42.4
FII Includes depository receipts
Stock Performance (1-year)
Larsen & Toubro
Sensex - Rebased
1,500
1,400
1,300
1,200
1,100
1,000
Margin improvement to be driven by domestic order execution
As execution of domestic orders picks up, operating margins are expected to
improve for LT, as domestic orders enjoy better operating margins than
international orders. We have factored in margin expansion of 90bp (11.9%) in
FY18 to factor increased contribution from domestic projects.
Asset divestments to aid RoE improvement
LT is looking at asset monetization to improve return ratios and unlock shareholder
value. It has already sold its general insurance business (INR1b loss in FY16), listed
its IT businesses, and entered into an agreement with Adani Ports for sale of
Kattupalli Port (INR2.5b loss in FY16/17). It is looking to divest its portfolio of
operational road assets (INR6b loss in FY16/17). The divestment of loss-making
businesses would add ~2% to RoE.
Focus to improve working capital cycle
Under its Lakshya strategic plan, LT intends to bring down NWC to 18% of sales by
FY21. NWC was brought down from 25% at the end of FY16 to 21.5% at the end of
3QFY18. We expect working capital to remain at similar levels in FY19 (~21% of
sales), given that higher working capital is required as domestic execution picks up.
Working capital cycle for the domestic projects is slightly elongated as compared to
overseas working capital cycle.
March 2018
24

Industrial Capex | On recovery path
Valuation and view
LT is exposed to several levers across business/geographical segments, and has
emerged as the E&C partner of choice in India, which provides a robust foundation
to capitalize on the next leg of the investment cycle. The management’s intent is to
improve consolidated RoE to 18% (12% in FY16) by FY21 by capping investment in
concession business and asset monetization is an important part of this strategy. We
maintain our
Buy
rating with an SOTP-based price target of INR1,670 (25x FY20E
standalone EPS to which we add INR505 for subsidiaries).
Story in charts
Exhibit 33:
Domestic ordering activity to pick up from FY19,
given multiple large projects lined up for awarding
Domestic Orders (INR b)
50
25
(20)
537
FY12
670
FY13
(6)
(26)
627
FY14
943
FY15
695
FY16
795
795
874
961
14
0
10
10
(5)
145
FY13
393
FY14
(28)
284
FY15
8
39
(8)
283
FY17
(13)
246
FY18E
343
FY19E
YoY growth
Exhibit 34:
Overseas ordering activity to pick up in FY19,
given low base in FY18
171
Overseas (INR b)
YoY growth
4
308
FY16
357
FY20E
FY17 FY18E FY19E FY20E
Source: MOSL, Company
Source: MOSL, Company
Exhibit 35:
Domestic revenue growth to be healthy, given
smooth execution of orders in hand
23.2
Domestic E&C Revenue (INR b)
11.5
0.9
-9.3
419
FY12
467
FY13
471
FY14
427
455
477
525
588
676
6.4
4.9
YoY growth
12.0
15.0
Exhibit 36:
Overseas revenue growth to slow down with
slowdown in ordering activity in Middle East
Overseas E&C Revenue (INR b)
182.6
YoY Growth
10.0
24.3
17.6
4.6
34.8
15.5
11.0
10.5
-4.7
291
46
FY12
130
FY13
153
FY14
160
216
249
276
305
FY15 FY16E FY17E FY18E FY19E FY20E
Source: MOSL, Company
FY15 FY16E FY17E FY18E FY19E FY20E
Source: MOSL, Company
Exhibit 37:
EBITDA margin to improve with execution of
domestic orders
13.5
13.3
Adj EBIDTA (INR b)
12.6 12.3
10.3 10.1
EBIDTA Margin (%)
11.0
11.9
11.9
Exhibit 38:
Consolidated RoE to improve with improvement
across operational parameters
RoE
29.5 30.1 30.0
RoE(Core E&C business ex investment in subs)
24.5
25.9
18.6 18.2 18.4 16.5 18.1
22.2
17.4 18.4 17.0 15.3
15.1
12.8 11.2
12.5 13.0 14.1
9.7
Source: MOSL, Company
Source: MOSL, Company
March 2018
25

Industrial Capex | On recovery path
Exhibit 39:
Order pipeline over next few years
Description
Shivaji Memorial, Mumbai
International convention and expo centre - Delhi
Mumbai Pune Expressway Missing link project (12kms)
Bandra Versova Sea link(MSRDC)
Mumbai Coastal Link road (BMC)
Mumbai Metro Phase 4 Wadala - Ghatkapor -Thane- Kasarvadali(32kms)
Mumbai Metro Phase 2B DN Nagar-Bandra- Mankhud(24kms)
Mumbai- Nagpur expressway - Samruddhi Mahamarg
Mumbai - Baroda Expressway
Navi Mumbai International Airport
Mumbai Airport expansion
Virar Alibaug Mutlimodal corridor
Delhi Metro Phase IV
Nagpur Metro Phase 1
GMR Delhi Airport expansion
Hyderabad Airport Expansion
CST - Panvel Elevated corridors(48.3kms)
Bandra - Virar Elevated corridors
Mumbai - Ahmedabad bullet train
Total
Segment
B&F
B&F
Road
Roads
Road
Metro
Metro
Roads
Roads
B&F
Airport
Roads
Metro
Metro
Airport
Airport
Rail
Rail
Rail
Value (INR b)
36
260
50
75
150
145
110
460
350
120
35
120
55
87
160
25
146
195
1,100
3,679
Source: MOSL, Company
Valuation and view
A foreword on long-term industry view
The capex cycle in India peaked in FY13, when the share of private sector was ~60%
of projects under implementation. Since then, the share of the private sector has
been declining and is now ~40%. In the meantime, the government has stepped up
infrastructure spending to offset the decline in private spending. This trend is
starting to reverse – private sector project sanctions too saw a 92% surge to INR1.8t
in FY17 after declining for six years; we expect ordering and capex to follow.
L&T in this industry backdrop
Five-year strategic plan ‘Lakshya FY16-21’ in place:
LT has put in place its five-
year strategic plan, ‘Lakshya’, which focuses on (a) doubling sales to INR2t by
FY21, (b) expanding margins (ex-services) from 10% in FY16 to 11.2% in FY21, (c)
value unlocking either by listing assets or by divesting non-core assets, (d)
improving RoE from 12% in FY16 to 18% in FY21, and (e) bringing down working
capital from 24% in FY16 to 18% by FY21. Successful implementation of the
strategic plan would ensure healthy operational growth for LT.
Recent operational performance provides confidence on successful
implementation of ‘Lakshya’:
LT’s efforts to successfully implement ‘Lakshya’
are visible in its recent performance on multiple fronts. It has been able to bring
down net working capital to 20% in 2QFY18 from 24% in FY16. Operating margin
(ex-services) has shown signs of picking up (11.5% in 3QFY18). Listing of L&T
Finance, IT and technology services and divestment of non-core assets (L&T
Cutting Tools, EWAC Alloys, L&T General Insurance, Seawood Retail Mall, South
City Projects) give confidence on continued divestment of assets. We expect LT
to register 10% revenue CAGR over the FY17-21, with margin expanding 200bp
to 12.3%. Conscious efforts to bag orders with better margin profile and cost
control measures should ensure margin improvement, going ahead.
March 2018
26

Industrial Capex | On recovery path
What it means for our target price
Three-year view:
We value LT’s core E&C business at 25x FY21E EPS (higher end
of the last 5-year trading band of 20-25x given our premise of pickup in private
capex cycle, supported by government capex) and other businesses at
respective historical industry averages (works out to INR1,820). This implies
returns CAGR of 13%.
One-year view:
LT has cut its order inflow guidance from 10-12% to zero to
marginally positive for FY18. Its order announcement for 3QFY18 (INR380b) is
encouraging and can lead to higher single-digit order inflow growth for FY18.
Furthermore, LT has maintained its revenue growth guidance of 10-12% and
margin improvement guidance of 25bp for FY18. Given operational performance
improvement and better ordering visibility on pickup in economic activity, we
value LT on SOTP basis at INR1, 670.
Exhibit 40:
Valuation methodology
Description
Construction Business
L&T Standalone
L&T Hydrocarbons
Service Segments
L&T Infotech (84.6% stake)
L&T Technology Sevices(90% stake)
Finance Sevices (67% stake)
Sapura Shipping
L&T Realty
Asset Ownership / Project Developer
IDPL - Roads, Transmission
Hyderabad Metro
Power Development Projects
Manufacturing Ventures
Power Equipment
Shipbuilding
Special Steel and Heavy Forgings
Less: Holding Company Discount of 20%
Total
Method
Mar'20E PER (x)
Mar'20E PER (x)
Mar'20E PER (x)
Mar'20E PER (x)
Mar '20E PBV (x)
Mar '20E PBV (x)
Mar'20E PER (x)
Mar '20E PBV (x)
Mar '20E PBV (x)
Mar '20E PBV (x)
Mar'20E PER (x)
Mar '20E PBV (x)
Mar '20E PBV (x)
Valuation
multiple
25.0
25.0
12.0
12.0
3.0
1.5
15.0
0.5
0.5
1.0
15.0
1.0
1.0
Value
(INR b)
1,627
182
152
97
232
0
41
23
32
31
30
31
4
2,485
Value
(INR/sh)
1,162
130
108
70
166
0
29
17
11
22
21
22
3
-94
1,670
Source: MOSL, Company
Rationale
Higher end of 5 year trading band of 20-25x
At par to mid tier IT companies; excl. stake
sold via OFS
At par to mid tier IT companies excl. stake sold
via OFS
3x P/BV on FY19
0.5x Book Value to capture the losses
To account for losses in the Metro business
At Book Value, given Case 2 bid
Expect industry project awards to sustain at 5-
7GW pa
Increased possibility of Defence (Naval) orders
Possibility of Nuclear project awards to
commence in FY19
March 2018
27

Industrial Capex | On recovery path
Financials and Valuations
Income Statement
Y/E March
Net Revenues
Growth Rate (%)
Manufacturing Expenses
Staff Cost
S G &A Expenses
EBITDA
Change (%)
Adj EBIDTA
EBITDA Margin (%)
Depreciation
EBIT
Net Interest
Other Income
Profit before Tax
Tax
Effective Tax Rate (%)
Reported Profit
Less:Addl tax on dividend by Subs
Less: Minority Interest
Add: Profits of Associates
EO Adjustments
Adjusted Profit
Growth (%)
Cons. Profit (Reported)
2013
744,980
16.0
546,888
62,446
36,359
99,287
14.3
99,287
13.3
16,371
82,917
21,243
10,557
72,231
23,790
32.9
51,808
130
722
384
3,368
47,973
5.3
51,341
2014
851,284
14.3
616,948
80,276
46,517
107,543
8.3
107,543
12.6
14,458
93,085
31,414
9,819
71,490
26,076
36.5
48,817
208
-382
93
3,402
45,680
-4.8
49,083
2015
920,046
8.1
672,937
79,222
54,531
113,356
5.4
113,356
12.3
26,225
87,131
28,507
10,072
68,696
22,836
33.2
49,337
0
1,710
21
3,477
44,171
-3.3
47,648
2016
1,019,753
10.8
724,089
133,308
57,728
104,628
-7.7
104,628
10.3
17,867
86,761
16,551
9,044
79,254
24,848
31.4
55,348
0
3,118
-9,902
942
41,387
-6.3
42,329
2017
1,100,110
7.9
780,393
138,531
70,440
110,747
5.8
110,747
10.1
23,699
87,048
13,398
14,010
87,659
20,066
22.9
68,808
0
4,443
-3,953
1,214
59,198
43.0
60,412
2018E
1,201,839
9.2
856,688
147,497
65,068
132,586
19.7
132,586
11.0
19,915
112,671
15,185
13,985
111,471
32,327
29.0
80,375
0
6,096
-5,028
1,230
68,021
14.9
69,251
2019E
1,355,555
12.8
959,746
166,362
68,322
161,126
21.5
161,126
11.9
22,094
139,032
30,614
19,908
128,326
35,931
28.0
92,395
0
6,550
-4,997
0
80,848
18.9
80,848
(INR m)
2020E
1,475,570
8.9
1,046,728
181,091
71,738
176,013
9.2
176,013
11.9
21,731
154,282
30,083
24,391
148,590
41,605
28.0
106,985
0
7,185
-2,441
0
97,359
20.4
97,359
Balance Sheet
Y/E March
Equity Capital
Reserves and Surplus
Net Worth
Debt
Deferred Tax Liability
Minority Interest
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
2013
1,231
337,366
338,597
619,936
1,837
26,529
986,899
379,822
75,670
113,068
417,220
87,675
51,874
230,149
35,715
84,536
201,930
924,213
442,209
482,004
986,899
2014
1,854
375,262
377,116
801,529
3,375
31,792
1,213,812
411,347
88,824
143,237
465,760
81,090
55,275
263,846
40,966
134,755
254,934
1,150,574
483,612
666,962
1,213,812
2015E
1,859
410,222
412,081
767,297
-3,504
19,706
1,195,580
168,322
6,555
103,416
265,184
113,089
59,812
222,544
44,126
13,491
416,488
1,313,997
496,690
817,307
1,195,579
2016
1,863
439,941
441,804
881,352
-7,364
28,928
1,344,719
167,706
23,518
151,651
295,839
110,791
48,542
260,250
53,899
16,889
481,865
1,527,390
589,299
938,092
1,344,722
2017E
1,866
500,299
502,165
939,761
-11,252
35,636
1,466,310
171,779
38,375
167,374
300,778
197,530
41,397
279,696
55,725
19,547
488,977
1,605,954
637,950
968,004
1,466,312
2018E
1,866
545,713
547,578
1,041,696
-11,252
41,732
1,619,754
181,779
58,290
167,374
290,864
217,530
45,225
328,609
129,645
21,354
550,657
1,808,304
696,943
1,111,361
1,619,755
2019E
1,866
600,707
602,573
1,044,613
-11,252
48,282
1,684,216
171,779
80,384
167,374
258,769
217,530
51,009
370,638
181,921
24,085
621,087
1,993,999
786,082
1,207,917
1,684,216
(INR m)
2020E
1,866
668,383
670,249
1,047,779
-11,252
55,467
1,762,243
161,779
102,115
167,374
227,039
217,530
55,526
403,453
254,130
26,218
676,075
2,173,353
855,678
1,317,675
1,762,244
March 2018
28

Industrial Capex | On recovery path
Financials and Valuations
Ratios
Y/E March
Basic (INR)
Standalone EPS Adj
Growth (%)
Consolidated EPS Adj
Growth (%)
Con. EPS (Fully Diluted)
Growth (%)
Cash EPS
Book Value
Dividend Per Share
Div. Payout (Incl. Div Tax ) %
Valuation (x)
P/E (Standalone)
P/E (Consolidated)
P/E (Consolidated) (Fully Diluted)
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)
2013
32.6
3.7
34.3
5.3
34.3
5.3
46.0
242.0
7.6
22.2
2014
35.0
7.4
32.6
-4.8
32.6
42.8
43.0
269.5
9.4
28.9
2015
33.6
-4.2
31.6
-3.3
31.6
-3.3
50.3
294.5
8.7
27.5
38.7
40.2
40.2
25.2
22.0
3.0
4.7
0.7
15.3
8.3
112.8
25.4
0.8
2.1
1.0
12.8
7.2
113.1
23.7
0.7
2.4
1.2
11.2
7.7
88.3
23.7
0.8
2.6
0.8
2016
31.7
-5.5
29.6
-6.3
29.6
-6.3
42.3
315.7
12.5
42.3
41.0
42.9
42.9
29.9
24.9
2.7
4.3
1.0
9.7
7.4
93.2
17.4
0.8
2.6
0.8
2017E
32.6
2.7
42.3
43.0
42.3
43.0
59.2
358.8
14.0
33.2
39.9
30.0
30.0
21.4
24.0
2.6
4.0
1.1
12.5
8.0
92.8
13.7
0.8
2.5
0.7
2018E
39.4
20.8
48.6
14.9
48.6
14.9
62.8
391.3
14.2
29.2
33.0
26.1
26.1
20.2
20.3
2.4
3.5
1.1
13.0
8.3
99.8
13.7
0.7
2.6
0.8
2019E
45.0
14.4
57.8
18.9
57.8
18.9
73.6
430.6
16.2
28.1
33.0
21.9
21.9
17.2
16.4
2.2
3.2
1.3
14.1
9.9
99.8
13.7
0.8
2.5
0.7
2020E
51.7
14.8
69.6
20.4
69.6
20.4
85.1
478.9
18.6
26.7
28.9
18.2
18.2
14.9
14.6
1.9
2.9
1.5
15.3
10.4
99.8
13.7
0.8
2.5
0.6
Cash Flow Statement
Y/E March
PBT before EO Items
Add : Depreciation
Change in diff tax liability
(Inc)/Dec in WC
CF from Operations
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Investments
(Inc)/Dec in Net Worth
(Inc)/Dec in Debt
Change in Minority Interest
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2013
52,057
16,371
-43,158
-84,641
-59,372
-90,670
-150,042
220
-90,237
5,057
148,436
8,994
-12,385
150,102
493
35,222
35,715
2014
49,020
14,458
1,538
-179,708
-114,692
-62,998
-177,690
6,585
-56,413
4,821
181,593
5,263
-15,322
176,355
5,251
35,715
40,966
2015
47,648
26,225
-6,879
-147,185
-80,191
174,351
94,161
-31,999
142,352
1,419
-34,233
-12,086
-14,103
-59,002
3,160
40,966
44,126
2016
42,329
17,867
-3,860
-111,011
-54,675
-48,523
-103,198
2,298
-46,225
7,731
114,058
9,222
-20,337
110,674
9,774
44,126
53,900
2017E
60,412
23,699
-3,888
-28,086
52,138
-28,638
23,499
-86,740
-115,378
22,768
58,408
6,708
-22,818
65,065
1,825
53,900
55,725
2018E
69,251
19,915
0
-69,437
19,728
-10,000
9,728
-20,000
-30,000
-1,230
101,933
6,096
-22,607
84,192
73,920
55,725
129,645
2019E
80,848
22,094
0
-44,280
58,663
10,000
68,663
0
10,000
0
2,917
6,550
-25,854
-16,387
52,276
129,645
181,921
(INR m)
2020E
97,359
21,731
0
-37,549
81,540
10,000
91,540
0
10,000
0
3,166
7,185
-29,683
-19,331
72,209
181,921
254,130
March 2018
29

26 March 2018
Cummins India
BSE SENSEX
32,597
S&P CNX
9,998
Cummins India
TP: INR1,040(+42%)
Update | Sector: Capital Goods
CMP: INR733
Buy
Infrastructure spend to drive domestic business
Exports bottomed out; expect pick-up from FY19
Infrastructure spending to support domestic revenue growth
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 (%)
KKC IN
277.2
1096 / 729
-11/-21/-32
203.2
3.1
336.0
49.0
Financials Snapshot (INR b)
2018 2019E 2020E
Y/E MAR
50.8
50.7
59.9
Net Sales
8.0
7.3
10.1
EBITDA
7.3
6.4
8.7
PAT
26.5
23.2
31.3
EPS (INR)
-2.6 -12.4
34.6
Gr. (%)
135.0 143.9 156.0
BV/Sh (INR)
21.2
16.7
20.8
RoE (%)
20.0
16.0
20.0
RoCE (%)
31.2
35.7
26.5
P/E (x)
6.1
5.8
5.3
P/BV (x)
Shareholding pattern (%)
Dec-17 Sep-17 Dec-16
As On
Promoter
51.0
51.0
51.0
DII
21.0
21.1
20.3
FII
15.3
15.3
15.7
Others
12.7
12.6
13.0
FII Includes depository receipts
Stock Performance (1-year)
Cummins India
Sensex - Rebased
1,250
Pick-up in infrastructure spending has led to healthy growth in KKC’s industrial
business segment. Over the medium term, the company expects double-digit
growth in domestic sales, supported by strong infrastructure spending and pickup
in demand for backup power. Growth in domestic sales is likely to be driven by:
Industrial genset segment:
Road construction, railways and mining provide
strong opportunities for KKC’s industrial genset segment, given the
government’s focus on infrastructure development. Over the medium term,
KKC expects higher growth in the industrial genset segment than in the power
generation segment.
Power generation segment:
Growth in this segment is directly correlated to
domestic GDP growth and would be driven by back-up power installations by
end-consumers. Revival is seen in key end-markets – IT/ITES, hotels, hospitals,
and data centers.
Distribution segment:
KKC continues to see good growth, driven by healthy
orders for spare parts, improving penetration of service contracts, and demand
for engines from key accounts.
Multi-pronged approach leads to market share gain in HHP segment,
despite fierce competition
Competition in diesel gensets remains intense, as demand has been subdued in the
last few years. Despite this, KKC has been able to gain share, given its focus on (1)
retaining market share (taken price cuts in response to rising competition), (2)
improved product offerings (via better-technology engines, strong service and
OEM/dealer network, and spare parts availability to ensure minimum downtime),
(3) ‘fit for market’ solutions and expansion of product range to serve local and
global markets, and (4) reducing costs through value engineering.
Distribution business to register double-digit growth, led by higher
industrial contribution
1,100
950
800
650
The distribution & spares business should perform well, given higher sales
contribution from the industrial segment, where machine usage is intense
(consequent wear and tear of machines augments the need for spares). Also, given
the large installed base of machines, demand for spares is expected to remain
robust. We expect KKC to register double-digit growth in the distribution segment.
Exports muted; however, worst appears to be behind and demand to pick up
Exports have been weak, given bleak demand from end-markets like Africa, LATAM
and the Middle East. However, we expect demand to revive from FY19, given
stable crude prices and firming up of industrial commodity prices. For the long run,
the company has guided low-double-digit growth in exports.
March 2018
30

Industrial Capex | On recovery path
Valuation and View
KKC has, over the years, developed (a) a strong product portfolio with superior
technology to meet domestic demand, (b) a 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 FY19, we maintain our
Buy
rating, with a target price of INR1,040 (28x
FY20E EPS, below its 5-year average one-year forward P/E of 30x). The stock trades
at 35x FY18E EPS of INR23.2, 26x FY19E EPS of INR31.3, and 22x FY20E EPS of
INR37.1. 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.
Story in Charts
Exhibit 1:
KKC’s market share in the power genset segment
Cummins Power Gen sales
Market share(%)
39% 38%
34% 34% 36% 32% 33%
30% 31% 30%
Exhibit 2:
Market share by players
14%
7%
17%
25%
38%
21%
26%
Cummins
KOEL
Mahindra
Perkins
Others
Source: MOSL, Company
Source: MOSL, Company
Exhibit 3:
Segment-wise revenue break-up (FY17)
2%
28%
33%
Power gensets
industrial
Distribution
Exports
14%
24%
Source: MOSL, Company
Automotive
Exhibit 4:
Expect double-digit sales growth, driven by pickup
in the infrastructure segment
Total Sales
11%
-14%
11%
6%
8%
YoY growth
0%
18%
16%
Source: MOSL, Company
Exhibit 5:
EBIDTA margin to improve, with pickup in exports
segment
EBITDA
EBITDA Margin
Exhibit 6:
Robust return ratios, despite weak business
scenario
35.0
30.0
25.0
20.0
15.0
RoE
RoCE
Source: MOSL, Company
Source: MOSL, Company
March 2018
31

Industrial Capex | On recovery path
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
50,510
-0.5
32,322
5,100
5,827
7,261
14.4
981
2,185
168
8,298
1,918
23.1
6,380
0
6,380
-13.2
2019E
59,640
18.1
37,867
5,515
6,282
9,976
16.7
1,054
2,263
168
11,017
2,424
22.0
8,593
0
8,593
34.7
(INR Million)
2020E
68,817
15.4
43,693
6,228
6,881
12,015
17.5
1,127
2,344
168
13,065
2,874
22.0
10,190
0
10,190
18.6
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.
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
12,894
5,192
3,336
23,483
6,003
9,381
897
1,287
5,915
9,964
8,843
1,121
13,519
34,941
2017
554
36,867
37,422
2,508
24
39,953
22,705
7,703
15,001
4,631
7,074
23,702
5,621
9,557
1,291
1,287
5,948
10,455
9,036
1,419
13,247
39,953
2018E
554
39,325
39,879
2,508
24
42,411
24,205
8,684
15,520
4,631
7,074
25,296
5,435
9,241
3,624
1,244
5,752
10,111
8,739
1,372
15,186
42,411
(INR Million)
2019E
554
42,635
43,190
2,508
24
45,721
26,205
9,738
16,466
4,631
7,074
29,507
6,428
10,929
3,877
1,471
6,802
11,957
10,334
1,623
17,550
45,722
2020E
554
46,561
47,115
2,508
24
49,647
27,705
10,865
16,839
4,631
7,074
34,935
7,436
12,643
5,285
1,702
7,869
13,832
11,955
1,877
21,102
49,647
March 2018
32

Industrial Capex | On recovery path
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
2015
28.3
31.2
104.1
14.0
49.4
25.9
23.5
27.5
4.7
7.0
1.9
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
28.8
29.0
26.4
78
57
51
1.5
0.0
2016
27.2
30.1
125.6
14.0
51.5
26.9
24.3
26.1
4.4
5.8
1.9
23.7
23.9
24.0
73
47
43
1.3
0.0
2017
26.5
29.6
135.0
14.0
52.8
27.7
24.8
25.5
4.1
5.4
1.9
21.2
20.0
22.1
69
40
44
1.3
0.1
2018E
23.0
26.6
143.9
12.2
52.8
31.8
27.6
27.8
4.1
5.1
1.7
16.5
15.8
17.9
69
40
44
1.2
0.1
2019E
31.0
34.8
155.8
16.4
52.8
23.6
21.1
20.2
3.5
4.7
2.2
20.7
19.8
24.3
69
40
44
1.3
0.1
2020E
36.8
40.8
170.0
19.4
52.8
19.9
18.0
16.7
3.0
4.3
2.6
22.6
21.7
27.0
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
1,461
-4,039
2,922
0
0
-4,518
0
(1,595)
98
799
897
2017
9,082
848
168
-1,736
498
8,860
0
8,860
(2,446)
6,414
(3,789)
-6,236
(221)
0
0
-4,516
2,508
(2,230)
395
897
1,291
2018E
8,298
981
168
-1,918
226
7,755
0
7,755
(1,500)
6,255
0
-1,500
0
0
0
-3,922
0
(3,922)
2,332
1,291
3,624
(INR Million)
2019E
11,017
1,054
168
-2,424
(2,279)
7,536
0
7,536
(2,000)
5,536
0
-2,000
0
0
0
-5,283
0
(5,283)
253
3,624
3,877
2020E
13,065
1,127
168
-2,874
(2,313)
9,173
0
9,173
(1,500)
7,673
0
-1,500
0
0
0
-6,265
0
(6,265)
1,408
3,877
5,285
March 2018
33

26 March 2018
Initiating Coverage
| Sector:
Capital Goods
Engineers India
BSE SENSEX
32,597
S&P CNX
9,998
Engineers India
TP: INR 200 (+32%)
Buy
CMP: INR151
Pure play on revival in hydrocarbon capex in India
Strong order backlog at 5x FY18E sales; revenue to double over FY17-20
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 (%)
ENGR IN
673.9
206 / 141
-6/-3/-10
114.8
1.8
466.0
48.0
Oil marketing companies (OMCs) are stepping up capex, with potential capacity
addition of 74mmtpa (134mmtpa including the West Coast Refinery) over the next 5-
7 years, implying a capex of INR4.2t.
ENGR is a market leader in the hydrocarbon segment; as a preferred vendor for the
OMCs, it will be a key beneficiary of the upcoming capex by the OMCs.
We expect revenue CAGR of 25% and earnings CAGR of 22% over FY17-20. We
initiate coverage, with a Buy rating and target price of INR200 (24x FY20E EPS; 20%
premium to 5-year average).
Financials Snapshot (INR b)
Y/E March
FY18E FY19E FY20E
18.0
23.8
28.3
Net Sales
4.6
5.0
6.1
EBITDA (Rs b)
4.0
4.3
5.2
NP
6.3
6.9
8.2
EPS
48.1
9.2
19.8
EPS Gr (%)
44.0
47.5
51.7
BV/Share (Rs)
24.0
22.0
18.3
P/E (x)
3.4
3.2
2.9
P/BV (x)
13.9
14.1
15.6
RoE (%)
13.9
14.1
15.6
RoCE (%)
Shareholding pattern (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
52.0
54.2
58.9
DII
25.7
22.1
18.9
FII
5.9
6.6
6.6
Others
16.5
17.1
15.6
FII Includes depository receipts
Stock Performance (1-year)
Engineers India
Sensex - Rebased
210
Cash-rich OMCs to step up capex over next 5-7 years
After the deregulation of diesel prices, OMCs’ cash flow generation has improved
significantly. Under-recoveries, which earlier impacted the OMCs’ profitability,
have ceased. They are now flush with cash and are placing orders for upgradation
of their facilities to comply with BS-VI emission norms (INR300b capex). Also,
refinery capacity addition should pick up in the medium term, given that current
capacity utilization stands in excess of 100%. OMCs have capacity addition plans of
74-134mmtpa in the near to medium term to meet incremental demand.
Engineers India to be key beneficiary
To meet incremental demand, OMCs plan to install fresh capacity of 74mmtpa
(134mmtpa including the 60mmtpa West Coast Refinery) over the next 5-7 years,
entailing a capex of INR4.2t. Given that it is a preferred partner for the
government-owned OMCs for project management consultancy and EPC services,
we expect Engineers India (ENGR) to be a key beneficiary. We anticipate an
opportunity worth INR160b for ENGR for project management consultancy
projects.
Order backlog provides strong earnings visibility
ENGR witnessed its highest ever order inflow of INR57.1b in FY17, driven by robust
EPCM /PMC ordering from OMCs for upgradataion to BS-VI technology. 60% of the
orders received in FY17 came from the turnkey segment and the balance 40% from
the consultancy segment. ENGR’s order backlog is a healthy INR83b, providing
visibility of 5x its FY18E revenue of INR18b. Timely project execution should ensure
revenue CAGR of 25% and earnings CAGR of 14% over FY18-20. Earnings growth
would be lower than revenue growth due to the revenue mix tilting in favor of
turnkey projects (10% EBIT margins) as against consultancy projects (31% EBIT
margins). The contribution from turnkey projects is likely to increase from 19% in
FY18 to 34% in FY20.
190
170
150
130
March 2018
34

Industrial Capex | On recovery path
Initiate coverage with Buy
ENGR is a market leader in the hydrocarbon segment, where it provides consultancy
and turnkey solutions. OMCs’ strong cash flow position post diesel price
deregulation, the necessity to upgrade to BS-VI complaint facilities, and the need to
put up additional capacities, given 100% utilization of existing facilities augur well
for ENGR. OMCs plan to add 74-134mmtpa of capacity, involving an outlay of
INR4.2t. This provides potential business opportunity of INR160b for ENGR in the
consultancy segment. Given its debt-free balance sheet, robust business outlook,
market leadership, and strong execution capability, we initiate coverage on ENGR
with a
Buy
rating and target price of INR200 (24x FY20E EPS of INR8.2, 20% premium
to 5-year average multiple of 20x).
March 2018
35

Industrial Capex | On recovery path
Potential capex of INR4.2t from OMCs
BS-VI upgrades, greenfield/brownfield expansions driving capex
Cash-rich OMCs on capex drive
After the deregulation of diesel prices, OMCs’ cash flow generation has improved
significantly. Under-recoveries, which earlier impacted the OMCs’ profitability, have
ceased. They are now flush with cash and are placing orders for upgradation of their
facilities to comply with BS-VI emission norms (INR300b capex). Also, refinery
capacity addition should pick up in the medium term, given that current capacity
utilization stands in excess of 100%. OMCs have capacity addition plans of 74-
134mmtpa in the near to medium term to meet incremental demand.
Potential capex of INR4.2t
To meet incremental demand, OMCs plan to install fresh capacity of 74mmtpa
(134mmtpa including the 60mmtpa West Coast Refinery) over the next 5-7 years,
entailing a capex of INR4.2t.
Exhibit 7:
OMCs’ capacity addition plans
Name of company
BPCL
BPCL
BPCL
BPCL
BPCL
HPCL
HPCL
HPCL - construction to start in FY18
HPCL
HPCL - GAIL
IOC
IOC
IOC
IOC
IOC
IOC
IOC/CPCL
IOC/EIL/HPCL/BPCL
Euro IV to VI up gradation
Total
Location
Bina Ph 2
Numaligarh Refinery
Kochi Refinery Expansion
Kochi Petrochemical
Mumbai
Bhatinda expansion
Vizag
Barmer
Mumbai Expansion
Kakinada green field petrochemical plant
Koyali, Gujarat
Mathura
Panipat
Barauni
Paradip
Haldia
Nagapatnam refinery
Maharastra (West Coast Refinery)
Pan India
Value
(INR b)
200
100
150
45
22
200
430
39
400
60
75
180
75
125
13
275
1,500
300
4,189
Expansion
(mm TPA)
8 to 15
8-9
9.5 to 15.5
1.5
12 to 14
1
7 to 15
0 to 9
7.5 to 9.5m
1
13.5 to 18
8 to 11
15 to 25
6 to 9
15 to 20
7.5 to 8
0 to 9
40+20
Incremental capacity
(m)
7
1
6
1.5
2
1
8
9
2
1
4.5
3
10
3
5
0.5
9
60
134
Source: MOSL, Company
March 2018
36

Industrial Capex | On recovery path
Exhibit 8:
Peak utilization to ensure capacity addition happens in medium term
Incremental capacity (in 000 Ton)
96
101
88
102 102
96
Utilisation(%)
92
94
94
103 103 100 103 102 104 106 106
89
Source: MOSL, Company
Capex in the O&G space is being driven by upgrades related to BS-VI emission norms
(INR300b spend) and brownfield/greenfield refinery and petrochemical expansions
by various state-owned companies. Additionally, a few fertilizer plants are also
expected to be revived, providing further opportunities in this space. The overall
O&G capex (for the list of companies covered) had witnessed a big bump in FY14
and again in FY16/17. This was primarily due to commissioning of Reliance
Industries’ projects. Reliance has been in an expansion phase over the last few years
and with projects getting commissioned over FY14-18 (average annual capex of
INR621b), there would be a dip from FY19 (INR250b annually). Sector capex is likely
to decline to INR1.05t in FY19 from INR1.5t in FY18 (see exhibit below). We note
that Reliance Industries prefers placing orders with foreign contractors. Going
forward, capex in the sector is likely to be driven by state-owned entities.
Exhibit 9:
Oil & Gas sector capex over FY96-21E
O&G
Source: MOSL, Company
Exhibit 10:
Oil & Gas sector capex (ex-Reliance and ONGC)
O&G capex ex Reliance
504
379
316
336
324
503
496
514
504
628
Source: MOSL, Company
March 2018
37

Industrial Capex | On recovery path
Ordering has begun – ENGR is already sitting on a multi-year high backlog;
equipment suppliers and EPC contractors should benefit over the next few quarters.
All the major oil marketing companies have announced very large capex plans over
the next 5-7 years. We highlight these below:
Indian Oil Corporation:
IOCL plans to almost double capacity to 150mmtpa by
investing ~INR1.8t over the next 5-7 years. It would incur INR500b on Refining
(including INR110b for fuel upgradataion), INR300b on Petrochemicals, and
INR220b on Pipelines.
Hindustan Petroleum:
HPCL is looking to increase its refining capacity, which
has lagged its marketing capacity. Key refinery expansions include Mumbai,
Vizag and Barmer (includes petchem as well).
Bharat Petroleum:
BPCL is looking to expand capacity from 31mmtpa to
50mmtpa by FY22. Some of the key refinery expansions being planned are
Kochi, Bina, Mumbai, and Numaligarh (Assam).
In addition to the individual refinery capex planned by the three large oil majors, a
mega West Coast Refinery is also planned to be built in Maharastra (phase-1:
40mmtpa; phase-2: 20mmtpa). The total capex on this refinery is expected to be
INR1,500b. Land acquisition is currently ongoing for this project.
March 2018
38

Industrial Capex | On recovery path
Engineers India a key beneficiary of OMCs’ capex
Market leader in domestic hydrocarbon consulting space
Preferred vendor for OMCs
ENGR is a leader in the domestic hydrocarbon consulting space and is a preferred
vendor for OMCs. It provides end-to-end services from concept (process design) to
project commissioning (pre-commissioning and commissioning assistance). ENGR
has provided services to 20 of the 23 refineries operating in India and has installed
10 of the 11 mega petrochemical complexes in India. In the last few years, it has
built an impressive order backlog.
Exhibit 11:
ENGR’s service offerings – from concept to commissioning
Source: MOSL, Company
Exhibit 12:
Order inflow picks up, with OMCs planning to ramp up capacity
Order inflow (INR m)
YoY growth (%)
258%
90%
-81%
-20%
100%
-31%
-59%
22%
22%
FY17 order inflow driven by
finalization of Vizag refinery
order (INR25b) and CPCL
Manila refinery order
(INR12b)
97%
166%
33%
-64%
Source: MOSL, Company
March 2018
39

Industrial Capex | On recovery path
Foraying into new markets and new businesses
To mitigate business as well as geographical risks, ENGR intends to venture into new
business areas and new geographies. It plans to leverage its consultancy and EPC
acumen in new business areas like infrastructure, mining, water and waste water
treatment, and fertilizers. It also intends to participate in urban development,
airports, and highways, offering services like independent engineers, technical
audits, and EPC and consultancy services.
New segments:
ENGR has received a few orders in new segments like (a)
independent engineer services for airport at Mopa, Goa (INR112m), (b)
consultancy services for retrofitting of HRD-DCW package of alumina refinery at
Damanjodi, Odhisa (INR105m), and (c) third-party assessment for establishment
of Bhamashah state data center at Jaipur (INR219m). Water and waste water
management services also provide interesting opportunities for ENGR.
International market:
Given weak ordering in the domestic market, ENGR had
over the last 4-5 years, made an effort to increase penetration in the overseas
market to reduce its dependence on the domestic market. ENGR had bagged
strong orders from the Middle East in FY15. However, with crude oil price
declining, order inflow from the overseas market declined. International
markets provide strong business opportunity with oil prices firming up and
possible capex revival in the international markets.
March 2018
40

Industrial Capex | On recovery path
Revenue to double by FY20
Earnings to register 22% CAGR over FY17-20
Revenue to double over FY17-20
ENGR is the market leader in the hydrocarbon segment, providing consultancy and
EPC services to the OMCs. It has provided services to 20 of the 23 refineries
operating in India and has installed 10 of the 11 mega petrochemical complexes in
India. It is a preferred vendor for the OMCs and this is reflected in its robust order
backlog of INR83b (5x its FY18E revenue of INR18b). While empirical evidence
suggests that OMCs’ expansions are usually delayed, ENGR is involved purely in
consultancy services and DPR preparation, which remains on track.
We expect ENGR’s revenue to double by FY20, led by pickup in execution of orders
in hand. ENGR’s revenue is dependent on capex in the hydrocarbon segment, and is
therefore, susceptible to cyclicality. While FY08-11 saw robust revenue CAGR of
49%, supported by 46% CAGR in order backlog, FY12-17 saw revenue decline of 17%
per annum as order backlog growth slowed down to 11% per annum.
Exhibit 13:
Revenue to register robust growth, given healthy order book
108
29
30
42
Revenue (INR m)
Growth YoY
31
-32
-27
-6
-12
-1
-3
24
32
Source: MOSL, Company
Order backlog provides strong earnings visibility
ENGR has witnessed strong order inflow of INR57.1b in FY17, its highest ever order
inflow, given robust EPCM ordering from OMCs for up gradation to BS-VI
technology. 60% of the orders received in FY17 came from the turnkey segment and
the balance 40% from the consultancy segment. Order backlog for ENGR stands
healthy at INR83b, providing strong visibility of 5x its FY18E revenue of INR18b.
Exhibit 14:
Order inflow to remain healthy, given strong
capex planned by OMCs
Order inflow (INR m)
97%
166%
33%
-64%
-81%
90%
YoY growth (%)
258%
22% 22%
-59%
Exhibit 15:
Healthy order backlog providing revenue
visibility of 5x its FY18E revenue
148
66.0
(7.0)
Order backlog (INR m)
20.0
(12.3) 25.1 4.1
(39.3)(27.0)
YoY growth (%)
104.9
6.9 5.6 7.4
100%
-20%
-31%
Source: MOSL, Company
Source: MOSL, Company
March 2018
41

Industrial Capex | On recovery path
Exhibit 16:
Segmental order book bifurcation (%)
Exhibit 17:
Consultancy order backlog bifurcation
Exports, 27
LTSK (%), 45
Consultancy
(%), 55
Source: MOSL, Company
Domestic ,
73
Source: MOSL, Company
Operating profit to register 26% CAGR over FY17-20
After sluggish performance over FY12-17 (operating profit declined at a
compounded annual rate of 15.5%, impacted by weak execution on account of
sluggish capex in the hydrocarbon segment), we expect operating profit to register
26% CAGR over FY17-20, driven by pickup in execution (25% CAGR). In FY18, we
expect 570bp margin expansion to 25.6%, as there was a provisional write-back of
INR580m in 9MFY18, adjusting for which operating margin would be 22.4%.
However, operating margin is expected to be 20.9% in FY19, given that revenue mix
is tilting towards turnkey projects, where margins are lower (expect 34%
contribution from turnkey projects in FY20 against 19% in FY18).
Exhibit 18:
Operating margins to decline post FY18, with revenue mix moving in favor of
turnkey projects, where margins are low
Operating profit (INRm)
26.4
23.4
22.7
19.0
Margins
20.9
11.6 13.0
22.4
20.9
21.6
22.9
18.4
24.6
20.2
Source: MOSL, Company
Earnings to register healthy 22% CAGR over FY17-20
ENGR has a strong balance sheet, with net cash and cash equivalents of INR28.5b.
Revenue mix and other income that the company earns on its cash determine its
earnings growth. FY08-12 saw strong earnings CAGR of 35%, driven by revenue
CAGR of 50%. Revenue growth was driven by strong finalization of orders in the
turnkey segment. However, FY12-17 earnings declined at 14% per annum on weak
economic scenario, impacting order finalization, and thus, revenue. Moving ahead,
despite 25% revenue CAGR over FY17-20, we expect earnings CAGR of 22%, with
revenue mix tilting towards LSTK contracts (34% in FY20 against 20% in FY17). 25%
CAGR in execution over FY17-20 should lead to 70bp margin expansion to 21.6%.
We expect RoE/RoCE to improve by 500bp over FY17-20 to 15.6%, led by recent
equity buyback and efficient utilization of assets. We expect asset turnover to
improve from 2.8x in FY17 to 4.3x in FY20.
March 2018
42

Industrial Capex | On recovery path
Exhibit 19:
Net profit growth to be healthy, driven by strong execution
77.0
3.1
36.1
26.4
Nert profit (INR m)
19.2
22.6
(1.2)
growth YoY (%)
38.9
(23.8)
(37.6)
(7.6)
3.8
9.2
19.8
Source: MOSL, Company
Exhibit 20:
Fixed asset turnover to pick up
Fixed Asset Turnover (x)
3.9
3.0
2.8
0.6
0.6
total Asset turnover
3.9
4.3
Exhibit 21:
RoE to improve with efficient utilization of assets
RoE (%)
11.9
11.8
14.1
15.6
3.2
10.6
10.5
0.7
0.7
0.8
0.9
Source: MOSL, Company
Source: MOSL, Company
March 2018
43

Industrial Capex | On recovery path
Initiate coverage with a Buy rating
Target price of INR200; key beneficiary of a recovery in O&G capex cycle
ENGR is a market leader in the hydrocarbon segment, where it provides
consultancy and turnkey solutions. OMCs’ strong cash flow position post diesel
price deregulation, the necessity to upgrade to BS-VI complaint facilities, and
the need to put up additional capacities, given 100% utilization of existing
facilities augur well for ENGR. OMCs plan to add 74-134mmtpa of capacity,
involving an outlay of INR4.2t. This provides potential business opportunity of
INR160b for ENGR in the consultancy segment.
We expect ENGR to register 25% revenue CAGR over FY17-20, driven by pick-up
in execution of orders in hand. Revenue growth would be supported by the
turnkey segment, where we expect 50% CAGR over FY17-20, led by execution of
the recently-won Vizag refinery order of INR25b and CPCL Manali refinery order
of INR12b. Consultancy revenue is likely to grow at a CAGR of 17%.
25% CAGR in execution over FY17-20 would lead to 70bp margin expansion to
21.6% and earnings CAGR of 22% over FY17-20.
Given its debt-free balance sheet, robust business outlook, market leadership,
and strong execution capability, we initiate coverage on ENGR with a
Buy
rating
and target price of INR200 (24x FY20E EPS, 20%premium to 5-year average
multiple of 20x).
Exhibit 23:
EV/EBITDA band
Exhibit 22:
P/E band
43.0
33.0
23.0
13.0
3.0
P/E (x)
Min (x)
Avg (x)
+1SD
37.2
26.4
18.9
11.4
4.9
24.7
Max (x)
-1SD
37.2
60.0
40.0
20.0
0.0
EV/EBITDA (x)
Min (x)
Avg (x)
+1SD
42.1
Max (x)
-1SD
20.7
13.1
0.1
5.5
15.0
Source: Company, MOSL
Source: Company, MOSL
March 2018
44

Industrial Capex | On recovery path
Risks and concerns
Slowdown in hydrocarbon capex:
A major proportion of ENGR’s revenue comes
from the hydrocarbon segment. Any slowdown in the hydrocarbon capex plans
can significantly impact the company’s earnings.
Increase in crude oil prices:
The deregulation of diesel prices has improved the
OMCs’ cash flows, leading to a revival in the hydrocarbon segment capex cycle.
Increase in crude oil prices may force the government to pass on under-
recoveries to the OMCs, impacting their cash flows and capex plans.
Delay in execution:
LSTK projects have long execution cycles (3-4 years) and low
operating margins (10%). Any substantial delay could lead to cost overruns and
negatively impact ENGR’s profitability.
SWOT ANALYSIS
Strengths
Market leader in providing
consultancy services in the
hydrocarbon segment
Robust execution capability
Preferred vendor for OMCs
Opportunities
Business opportunities on account
of upgradation to BS-VI and
expansions planned by OMCs
International market provides
exciting business opportunities
Recent diversification into different
business segments to provide new
business opportunities
S
W
O
T
Weaknesses
High proportion of earnings
dependent on hydrocarbon
segment
Threats
Rise in crude oil price may
force the government to
regulate diesel prices,
impacting the cash flows
and capex plans of OMCs
Currently ENGR enjoys
strong market share in the
hydrocarbon segment
capex driven by PSUs; entry
of foreign players can
impact its market share
March 2018
45

Industrial Capex | On recovery path
Bull & Bear case
Bull case
In our bull case, we assume higher growth than the base case in all segments.
We assume 33% revenue CAGR over FY18-20, led by expected pick up in the
order inflow finalization in the turnkey segment and smooth execution of those
orders. We assume higher operating margin than in the base case, driven by
operating leverage.
Assuming the same target multiple as in the base case, we get a bull case target
price of INR240 against a base case target price of INR200.
Bear case
In our bear case, we assume lower EBITDA margin than in the base case. We
assume EBIDTA margin at 20.2% in FY19 and sales CAGR of 21% (against 25% in
base case scenario) over FY18-20. Lower margins would be on account of weak
execution of the orders in hand and also as we assume delay in finalization of
the turnkey orders.
We assume muted execution relative to the base case in both the segments.
Assuming the same target multiple as for the base case, we get a bear case
target price of INR175.
Exhibit 24: Scenario Analysis – Bull Case
Sales
Growth YoY (%)
EBIDTA
EBIDTA Margin (%)
Growth YoY (%)
PAT
PAT Margin (%)
PAT Growth (%)
FY18E
18,000
24
4,031
22.4
33.8
3,400
18.9
18.6
FY19E
29,990
66.6
6,122
20.4
51.8
5,122
17.1
50.7
FY20E
34,161
13.9
7,284
21.3
19.0
6,047
17.7
18.0
Exhibit 25:
Scenario Analysis – Bear Case
Sales
Growth YoY (%)
EBIDTA
EBIDTA Margin (%)
Growth YoY (%)
PAT
PAT Margin (%)
PAT Growth (%)
FY18E
17,000
174
3,781
22.2
25.0
3,080
18.1
7.5
FY19E
20,692
21.7
4,178
20.2
10.5
3,637
17.6
18.1
FY20E
25,488
23.2
5,260
20.6
25.6
4,418
17.3
17.3
Source: Company, MOSL
Source: Company, MOSL
March 2018
46

Industrial Capex | On recovery path
Financials and Valuations
Standalone - Income Statement
Y/E March
Total Income from Operations
Change (%)
Raw Materials
Employees Cost
Other Expenses
Total Expenditure
% of Sales
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT bef. EO Exp.
EO Items
PBT after EO Exp.
Total Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY13
25,060
-32.2
11,163
5,766
2,277
19,206
76.6
5,854
23.4
109
5,745
0
3,164
8,909
-1
8,908
2,624
29.5
6,284
6,285
-1.2
25.1
FY14
18,236
-27.2
6,247
5,978
1,206
13,430
73.6
4,806
26.4
145
4,660
-1
2,320
6,981
10
6,990
2,192
31.4
4,798
4,791
-23.8
26.3
FY15
17,130
-6.1
5,835
5,919
3,383
15,137
88.4
1,993
11.6
196
1,797
-2
2,726
4,525
138
4,663
1,583
34.0
3,080
2,989
-37.6
17.4
FY16
15,110
-11.8
5,804
5,906
1,429
13,138
87.0
1,972
13.0
249
1,723
2
2,478
4,198
0
4,198
1,436
34.2
2,762
2,762
-7.6
18.3
FY17
14,486
-4.1
2,269
7,440
1,756
11,464
79.1
3,022
20.9
225
2,797
32
2,237
5,002
-900
4,102
1,752
42.7
2,351
2,866
3.8
19.8
FY18E
18,000
24.3
3,245
7,588
2,541
13,375
74.3
4,625
25.7
255
4,370
5
1,666
6,031
0
6,031
2,050
34.0
3,980
3,980
38.9
22.1
FY19E
23,797
32.2
7,084
8,366
3,360
18,810
79.0
4,987
21.0
286
4,701
5
1,790
6,486
0
6,486
2,140
33.0
4,345
4,345
9.2
18.3
(INR Million)
FY20E
28,309
19.0
8,949
9,224
3,997
22,170
78.3
6,139
21.7
316