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

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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