iip growth in fy17 shows fast growth in last five years · 2017-07-10 · capital goods sector...

Capital Goods Sector July 7, 2017

Sector Update

Sector Overview: The S&P BSE Capital Goods Index has out-performed the broader indices over the last one year. While S&P BSE Sensex delivered 16.6% YoY return, the S&P BSE Capital Goods Index delivered strong return of 22.4% YoY over the last one year. Similarly, a more recent data shows that in the last six months S&P Capital Goods Index has delivered 25% absolute return vs 17% return by S&P BSE Sensex during the same period. The outperformance was largely on the back of various reforms announced by the government in the Union Budget 2017-18. The government’s focus on “Make in India” programme, increased investment in roads and railway infrastructure and FDI in the defence sector is also expected to revive the overall investment cycle in the country. We believe that the Capital Goods sector companies are the immediate beneficiaries of the revival in the investment cycle in the economy. While the stretched balance sheet scenario of the private sector players may result in a slower growth over the near to medium term, but the continuous improvement in the government spending is expected to revive the investment cycle going ahead.

Comparison between return of S&P BSE Capital Goods Index and S&P BSE Sensex

Key macro trend indicating early signs of revival in capex

Index of Industrial Production (IIP) grew at a fastest pace in FY17 at 5% YoY, highest in last five years. This was mainly attributed to equal growth of ~4.9% YoY growth in the manufacturing sector (~78% of the weight in overall IIP). On the monthly basis, IIP has seen a gradual pick up since November 2016 mainly on the back of sharp improvement in manufacturing and electricity growth data. Capital goods sector after showing subdued performance in the first half of FY17 is showing early signs of recovery in the last few months. Capital goods sector under the IIP after growing by 2.1% YoY and 1.9% YoY in FY16 and FY17 respectively grew by ~5% YoY in April 2017. The domestic investment cycle seems to have bottomed out; however, government spending is required to continue to revive the investment cycle. As per the quarterly earnings data for the capital goods company, the momentum in the new orders has picked up significantly in the last few quarters in the Power Transmission & Distribution (T&D), defence equipment manufacturing and road & railway development space.

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Capital Goods Index outperforming S&P BSE Sensex in the last 6 months

S&P BSE Capital Goods S&P BSE SensexSource: Capitaline

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IIP and Capital Goods sector showing early signs of growth

IIP Capital Goods

Source: Department of Statistics & Programme Implementation

5.0

4.9

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FY13 FY14 FY15 FY16 FY17

Ch

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IIP growth in FY17 shows fast growth in last five years

IIP Manufacturing

Source: Department of Statistics & Programme Implementation

HDFC Bank Investment Advisory Group

Healthy growth in the quarterly earnings showing early signs of pick up in execution Quarterly results trend for S&P BSE Capital Goods companies are showing improving data with sales during Q4FY17 growing by ~11.4% YoY mainly led by sharp growth in sales for industry majors like Larsen & Toubro (up by 40.1% YoY) and BHEL (up by 52.1% YoY). The management commentary on the earnings call for various capital goods companies indicated that the execution of the slow moving projects and increased pace of approval resulted in healthy growth in execution especially in Q4FY17. On the full year basis, FY17 net sales for these companies grew by healthy rate of 7% YoY on account of pick up in the new order inflow and also fast execution of the same.

However, EBITDA margin declined marginally on YoY basis during the quarter mainly on account of rise in the key raw material prices. A sharp rise in the raw material and power and fuel cost towards the end of the fiscal FY17 led to the flat to negative trend in the operating margin for the capital goods companies. Average crude prices during Q4FY17 were up by ~56% YoY while coking coal prices were up by ~111% YoY. Similarly, average prices for aluminium, copper and steel were up by 22% YoY, 25% YoY and 69% YoY respectively during the same period. As per the management commentary during the Q4FY17 earnings concall, delayed pass on of the higher raw material prices was the main reason for a small dent in the operating margin for the companies. However, management commentary indicated that a gradual decline in raw material prices in the last few months would result in marginal uptick in the operating margin for them. Further it indicated an inclination of the companies towards improving product mix by increasing the share of high margin products to improve the overall margin going ahead.

Particulars

Rs. Bn Q4FY17 Q4FY16 Q3FY17 Change YoY (%) Change QoQ (%) FY17 FY16 Change YoY (%)

Net Sales 808.7 725.8 583.4 11.4 38.6 2522.0 2352.0 7.2

EBITDA 103.2 100.7 74.0 2.6 39.5 310.2 250.6 23.8

EBITDA Margin (%) 12.8 13.9 12.7 12.3 10.7

PBT 70.9 73.7 41.9 -3.8 69.2 206.0 158.1 30.3

PAT 61.4 51.9 29.1 18.3 111.4 127.7 80.3 59.0

Source: Capitaline

S&P BSE Capital Goods Index Companies data

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-5

0

5

10

Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17

Growth in New orders (%)

Qo Q YoYSource: RBI

70.2

73.6

71.7

73.5

71.5 71.4

72.2

74.6

73.6

73.172.7

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71

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in %

Gradual pick up in uilization on YoY basis seen in first three quarters of FY17

Source: RBI

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Sharp rise in the Brent crude and Coking coal prices in FY17 led to rise in power and fuel cost

Coking Coal Crude Source: Bloomberg

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Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17

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Key raw material prices showing sharp jump in Q3 and Q4 of FY17

Aluminium Copper SteelSource: Bloomberg

Strong order inflow and healthy order book gives revenue visibility for capital goods companies

Order inflow for our coverage companies grew sharply in Q4FY17 by 20.8% YoY led by strong growth in Defence and Power Transmission and Distribution companies. Order inflow after showing a negative trend in Q3FY17 on the back of demonetisation impact, grew sharply in Q4FY17 mainly on account of pick up in approvals and ordering by the public sector companies. Order inflow for defence component manufacturer like Bharat Electronics grew by 461% to Rs.100.8 bn while for Power T&D major like KEC International grew by 98.4% YoY and CG Power and Industrial Solution (formerly known as Crompton Greaves) grew by 42.5% YoY. Capital goods major, Larsen & Toubro order inflow grew by 8.2% YoY during Q4FY17 after a decline of 9.5% YoY in Q3FY17. On the back of strong pick up in the order inflows, order book for our coverage companies grew by 4.3% YoY to Rs.4285 bn.

Coverage: Apar Industries, L&T, CG Power, Voltas, Bharat Electronics, KEC International and BHEL

Management commentary for few companies under our coverage

Source: Company

Management commentaries on the end markets like Roads, Railway electrification and laying of Metro lines, Power T&D, Renewables especially Solar and Defence sectors were positive for the year ahead. Analysis of the order inflow for our coverage companies indicates that public spending continues to drive capex while private capex continues to remain subdued. We believe with increasing focus of state governments on development, select states have seen uptick in areas like Power T&D, Roads, and Irrigation etc. Commentary on international markets continues to be mixed bag, where Middle East market is seeing a slow down due to decline in oil prices, while order inflows from South East Asia, Africa and neighboring countries like Nepal, Bangladesh and Sri Lanka continues to show healthy growth. Management commentary indicated positive outlook in the medium to long term on the overall growth prospects given the central government policy actions and initiatives but highlighted that GST implementation could create near term uncertainty. Companies continue to focus on the domestic orders given the improved ordering from government on various infra related spending on roads, railways and Power T&D and also faster approval for the execution of the same.

475

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596641

369398 404

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Order inflow inmproving sharply in Q4FY17 for our coverage companies

Source: Company

3924 3931

4163

4109

4176

4099 4111

4285

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3900

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4300

4400


In R

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Improving order book for our coverage companies

Source: Company

Company Management Commentary

Management commentary highlighted that faster clearances and resultant execution pickup led to ~24%

YoY growth in sales to Rs.39.9 bn during Q4FY17. Management commentary indicated that order book is

expected to remain strong in FY18 due to expected order wins in areas of Aakash Missile, Weapon

Locating Radar, Voter Verifiable Paper Audit Trail, Missile Two Way data Link and Advanced Composite

Communication System.

Bharat

Electronics

The management has guided that the outlook for the cable business continues to remain strong driven by

rising demand from solar, wind and defence sectors. Management has guided for near-term challenges in

the conductor segment mainly due to short term impact of GST implementation, transition costs of moving

production to Jharsuguda plant (30,000 MTPA capacity) in Odisha and higher competition in Tariff Based

Competitive Bidding (TBCB) contracts where company is supposed to take fixed cost and as a result

guided for a lower EBITDA/MT of Rs.10,500 for FY18.

Apar

Industries

For FY18, the company has guided for an order inflow growth of 12-14% YoY. Management guided that

incremental order inflow growth would be supported by pick up in ordering activity in the power, railways,

hydrocarbon and defence segment. Revenue growth has been guided at 12% YoY for FY18 and EBITDA

margin with an improvement of 25 bps.

Larsen &

Toubro

The management is optimistic of the business prospects in the Transmission & Distribution and Railways

segment and expects growth in order inflows from not only overseas markets but also from the domestic

market (SEB and Private Players). The management has guided for a 15% YoY revenue growth in FY18

and stable operating profit at 9.5% for FY18 led by continued improvement in SAE, railways and cable

margins.

KEC

International

Pick up in key leading indicators showing early signs of revival in capex cycle

Gradual pick up in the utilization levels in the first three quarters of FY17 enhances the trigger for the private sector capex going ahead. Generally companies undertakes capex program when capacity utilization (CU) reaches 80-85% levels. Thus, a pickup in the volume growth may result in CU of ~80-85% for these companies in next 4-6 quarters which may result in order inflows from the domestic manufacturing companies as well.

Increase in Diesel consumption and sharp growth in Medium and Heavy Commercial Vehicles (MHCV) sales indicates pick in the economic activities and there by indicating signs of recovery in the business cycle. Generally, MHCV sales increases at the start of the capex cycle indicating optimism for the business prospects leading to increased need for transportation fleet requirement by the manufacturers.

Similarly, freight movement has increased significantly over the years and has shown sharp growth in port traffic volume growth in FY17. Traffic growth at 12 major ports in India grew by ~7% YoY in FY17 as against 4.3% YoY growth seen in FY16. Traffic volume growth at 12 major ports in India was highest in last nine years. Similarly, railway freight also grew marginally in FY17. However, given the sharp decline in coal off take (major contributor of railway freight) during FY17, marginal growth in rail freight indicates a sharp increase in movement of other commodities and raw materials in the country. We believe improvement in the freight data indicates increased movement of raw materials and finished goods across country and overseas as well.

70.2

73.6

71.7

73.5

71.5 71.4

72.2

74.6

73.6

73.172.7

69

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Q1

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Q2

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Q3

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in %

Gradual pick up in uilization on YoY basis seen in first three quarters of FY17

Source: RBI

-7% -24% -23%

33%

73%

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CY13 CY14 CY15 CY16 CY17(Upto April)

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Trend in Industrial Investment Proposals showing healthy growth in last four months

No of Proposals Proposed Investment (Rs Bn) Growth vs same period (%) (RHS)

Source: DIPP

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Diesel consumption picks up indicating pick up in economic activities

Source: Petroleum Planning & Analysis Cell

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Pick up in MHCV sales in last one year indicating early signs of revival in capex cycle

MHCV Monthly Sales IIP (RHS)Source: Bloomberg, Ministry of Statistics and Programme Implementation

519.2530.4

561.0569.8

560.1545.6

555.3

581.3

606.4

647.4

12.0

2.2

5.8

1.6-1.7

-2.6

1.8

4.7 4.3

6.8

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FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

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Traffic growth at major ports in India improving sharply in FY17

Traffic at major ports Change YoY (%)Source: Ministry of Shipping

804 837892 926

975 1014 1059 1101 1104 1107

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FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17*

In M

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Railway freight traffic growth showing positive growth in FY17 despite sharp dip in the coal off take

Source: Ministry of Railways, *Provisional data

Key growth drivers for capital goods companies going ahead

Increased infra spending on roads, railways especially metros and water ways

Over the last few years the government has been focusing on improving the transportation in the country with increased spending on roads, railways and waterways. Apart from development of national highways and rural roads (Pradhan Mantri Gram Sadak Yojana), government has also undertaken various projects like Dedicated Freight Corridors, Border linking roads, Industrial Corridor Chardham connectivity program, north east connectivity program and Sagarmala project (inland water way development) for improving the connectivity in the country. Government’s thrust on developing transportation system is evident with increased budgetary allocation towards various schemes for developing transportation system. Apart from higher budgetary allocation towards key segments like rural roads, highways and railways, government has also increased its budgetary allocation for 2017-18 towards metros (up by 14.6% YoY over RE 2016-17) and development of inland water ways (Sagarmala project allocation up by 33.3% YoY over RE 2016-17).

We believe government‟s focus on further developing highways and improving the rail connectivity in the country would significantly benefit the companies involved in these segments. In our model portfolio, we have Larsen & Toubro which derives ~65% of its revenue from infra projects especially roads and railway civil works. Similarly, increased focus on railway electrification would be beneficial for market leader like KEC International with ~25% market share in the railway electrification and

signaling work. Pick up in the demand for construction equipment carrying vehicles is likely to drive growth for Cummins India (manufacturer of engines) as well.

Power T&D segment to see substantial rise in spending over the next five years

Growth in the generation installed capacity and transmission line was in sync with each other up to end of 10th Five year plan. However, there was a huge disparity in the growth rate during 11th Five year plan and similar trend was seen in the 12th Five year plan (FY12–FY17) as well. Government has been focusing on increasing the generation capacities over the years, but the pace in the addition of transmission line could not catch with

Budgetary Spending Data

Name of the Ministry BE 2016-2017 RE 2016-2017 BE 2017-2018 BE17-18/RE16-17 BE17-18/BE16-17

Ministry of Railways 45000 46155 55000 19.2% 22.2%

Ministry of Road Transport and Highways 57976 52447 64900 23.7% 11.9%

Ministry of Rural Development 87765 97760 107758 10.2% 22.8%

Ministry of Urban Development 24523 32550 34212 5.1% 39.5%

Ministry of Water Resources, River Development and Ganga Rejuvenation 6201 4756 6887 44.8% 11.1%

Name of scheme BE 2016-2017 RE 2016-2017 BE 2017-2018 BE17-18/RE16-17 BE17-18/BE16-17

Pradhan Mantri Gram Sadak Yojna 19000 19000 19000 0.0% 0.0%

Urban Rejuvenation Mission : AMRUT & Smart Cities Mission 7296 9559 9000 -5.8% 23.4%

Metro Projects 10000 15700 18000 14.6% 80.0%

Integrated Power Development Scheme and Deen Dayal Upadhyaya Gram Jyoti Yojna 8500 7874 10635 35.1% 25.1%

Namami Gange- National Ganga Plan 2150 1441 2250 56.1% 4.7%

Sagarmala 450 406 600 47.8% 33.3%

In Rs. Cr Change YoY (%)

Source: India Budget Reports; BE : Budgetary Estimates, RE : Revised Estimates

Projects Roads Contract Awarded Railway Electrification Work

Year

FY14-17 35000 5118

FY18P 25000 4000

FY19P 30000 6000

Total 90000 15118

in Kilometers

Source: Ministry of Road Transport and Highway, Ministry of Railways

34294356 4488 4754

5669

15157

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FY12 FY13 FY14 FY15 FY16 FY17

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KEC International's increasing order book for railway electrification work

Source: Company

42.663.6

85.8105.0

132.3

199.9

326.8

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150.0

200.0

250.0

300.0

350.0

End of 6th Plan End of 7th Plan End of 8th Plan End of 9th Plan End of 10th Plan End of 11th Plan End of 12th Plan

In G

W

Installed Electricity generation capacity (GW)

Source: Central Electricity Authority

52034

79455

115742

147531

192535

248049

352295

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In c

km

AC Transmission Lines (ckm)

Source: Central Electricity Authority

the requirement for the same. The government of India is now increasing its focus on transmission sector. Government of India has taken number of steps - such as expediting forest clearances and intensive monitoring of critical transmission lines. As a result of which during the 12th Five year Plan period (2012-17), 1,04,246 ckm against the target of 1,00,000 ckm of transmission lines and 3,21,364 MVA against the target of 2,69,900 MVA of transformation capacity have been till March 2017. As per recent media reports, Central Electricity Authority (CEA) has estimated an investment of Rs.2.6 trillion during FY18-22 (13

th Electricity Plan),

up by ~49% over FY12-17 (12th Electricity Plan), into the transmission segment as National Electricity Plan-

Volume II, which would be the basis for investment and policy planning in the transmission sector against Phase I where focus was more on increasing the power generation capacity. The reports suggests that India would need 100,000 circuit km (ckm) of transmission lines and 2,00,000 MVA transformer capacity of substations at 220 kv and above voltage to be added in the 13th Five year plan.

We believe, with the increased focus on improving the Power Transmission and Distribution system in the country, companies like KEC International (Power T&D EPC contractor), Apar Industries (manufacturer of conductors and power cables) and CG Power and Industrial Solutions (manufacturer of Transformers and switch gears) in our model portfolio are likely be the major beneficial from the same.

Increased defence spending and governments thrust on indigenization of defence equipment manufacturing to drive growth for domestic equipment manufacturers

Defence revenue expenditure has been increasing at a much faster pace as compared to capital expenditure over the last few years. Over the last 10 years, revenue expenditure has grown at a CAGR of 12.3% from FY08-18 as against capital expenditure growth of 8.7% CAGR during the same period. Moreover, capital expenditure on the defence over FY14-17 has been more or less stagnant, indicating reduction in expenditure on defence equipment procurement as well as modernization of existing ones. As a result, Controller and Auditor General (CAG) Report of 2015 highlighted that there is a need for modernization of India’s defence equipment across armed forces. As a result, the government has proposed highest ever allocation for defence capital expenditure of Rs.865 bn for FY18, up ~20.6% YoY. In addition the government has been taking various policy actions to promote defence equipment manufacturing segment and substitute import mechanism by indigenously developed equipments to promote local manufacturers and enhance the defence manufacturing environment in the country. Over the years various policy actions like Defence Procurement Policy in 2016 (DPP 2016), 100% FDI in defence equipment manufacturing segment and other government initiatives have strengthen the recovery in the defence capex cycle. We believe, going ahead the favourable government policy which promotes self-reliance, indigenisation, technology upgradation and achieving economies of scale including development of capabilities for import substitution is likely to benefit domestic defence equipment manufacturers like Larsen & Toubro and Bharat Electronics in our model portfolio.

955411343

1282213993

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FY14 FY15 FY16 FY17

In R

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Skipper's increasing orderbook and revenue from Transmission Tower business indicates pick up in the T&D activity

Revenue Order BookSource: Company

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Apar Industries growth in cable business revenue indicates increased supply to T&D EPC companies

Source: Company

409

511

621

679705

791

734 717 717

865

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24.9

21.4

9.4

3.8

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%

In R

s. Bn

Budget - Capital Expenditure on Defence seen sharp improvement in BE FY18

Capital Exp. Change YoY (%) - RHSSource: India Budget Reports

India‟s competitive advantage on cost front to make India a hub for engineering exports

Indian engineering exports grew at by of 11.3% to USD 65.2 bn in FY17 from USD 58.6 bn in FY16. The US and Europe together account for about 60% of India’s total engineering exports. Indian engineering exports to Saudi Arabia, Thailand, the Netherlands, Malaysia, Czech Republic, Bangladesh and Egypt have also seen significant rise during the last few years. A key driver for increased engineering exports has been the shifting of global manufacturing bases to countries such as India that offer lower costs and good engineering aptitude. Moreover, the nature of Indian engineering exports is changing with time as India is fast moving from exporting low-value goods to developing countries to exporting high-value goods to developed countries. New opportunities, such as outsourcing of engineering goods and services, new product design, product improvement, and maintenance and designing of manufacturing systems, are providing fresh growth avenues. We believe, companies like BHEL, Larsen and Toubro, KEC International, Cummins India and CG Power and Industrial Solution in our model portfolio would be major beneficiary from the improvement in the exports on engineered products from India into overseas markets. We believe, governments increased thrust on improving the Ease of doing business scenario coupled with India‟s improving ranking on Global Innovation Index is likely to further enhance India‟s infrastructure for engineering & manufacturing goods, business sophistication, knowledge and technology and creative outputs. View: India‟s capital goods sector is positioned well to derive benefits from the increased government spending on various sectors like roads, railways, power T&D and defence sector in the near term and expected increase in ordering from private players on account of increasing utilization levels in the medium to long term. Various government programs on road development, laying down of metro lines and improving connectivity via inland water ways works in favour for companies involved in the road and railway EPC contracts. Similarly, increased allocation towards Power T&D system in the country augurs well for companies in Power T&D EPC space as well manufacturers of cables, conductors and transformers required for the same. On the defence front, the government has been taking various policy actions to promote defence segment and substitute import mechanism by indigenously developed equipments to promote local manufacturers and enhance the condition of defence system in the country. We believe, this is likely to benefit the domestic defence equipment manufacturers like BEL and L&T. Lastly, India‟s competitive advantage on the cost front coupled with various government initiatives to improve ease of doing business in the country augurs well for domestic electronic and engineering goods manufacturing companies. Given the huge scope of opportunity in the domestic markets coupled with increasing enquiries and orders from international markets augurs well for domestic capital goods manufacturing countries in India. In our model portfolio we have Buy rating on large integrated player like L&T (present in Power T&D, defence equipment manufacturing, infra space as well as civil works for metro and railway line), Cummins India (manufacturer of engines), BHEL (boiler and turbine and generator manufacturer), Bharat Electronics (electronic component manufacturer for defence equipments), Voltas (electrical, mechanical & refrigeration solutions), KEC International (involved in power T&D EPC space and railway electrification) and Apar Industries (manufacturer of conductors and cables). Apart from these, we have a Hold rating on CG Power and Industrial Solution (manufacturer of transformers and switch gears).

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Engineering Exports (in USD Bn) Change YoY (%)Source: Department of Commerce

Apar Industries Ltd. *CMP: Rs.770, Mkt Cap: Rs.30.74 bn

Background Apar Industries Limited (Apar) is engaged in the business of manufacture of conductors, transformer/specialty oils and power/telecom cables. The Company's segments are Conductor, Transformer/Speciality Oils, Power/Telecom Cables, and Others. The Company's specialty Oil business has a range of products, which falls under approximately four categories, such as transformer oils, white oils and liquid paraffin's, industrial/automotive oils and process oils. The Company produces aluminum conductors. Its Uniflex Cables Division is a manufacturer of electrical and telecommunication cables. Apar's Automotive Division markets a range of automotive lubricants ranging from two wheeler oils and gear oils greases. In industrial lubricants, it offers a range catering various segments of the industry, including hydraulic oils, industrial gear oils, general machinery oils, heat transfer oils, quenching oils, pneumatic oils, gas engine oils, marine oils rust preventives and specialty products.

Valuations and Chart

Earnings Summary (Consolidated)

Y/E Sales Growth EBITDA Margin PAT EPS Growth P/E Div. Yield 31-Mar Rs Mn (%) Rs Mn (%) Rs Mn Rs % X %

16A 50,785 (0.8) 3,625 7.1 1,217 31.6 145.8 24.4 0.8 17A 48,320 (4.9) 4,168 8.6 1,766 45.9 45.1 16.8 0.8 18E 51,219 6.0 4,553 8.9 1,996 51.8 13.0 14.9 0.8 19E 55,317 8.0 5,138 9.3 2,299 59.7 15.2 12.9 0.8

View: Apar Industries has established presence across diverse businesses like Conductors (23% market share), Transformers & Specialty Oils (45% market share), Cables and Auto Lubes. We believe with its diversified product profile, Apar is well positioned to reap the benefits of improvement in the power T&D space in India. Although the management is optimistic about the medium to long term demand for conductors business (contributing 47% of FY17 total revenue) in domestic market driven by strong capex outlay planned in transmission sector but have guided for near term slowdown in the conductor segment. Management expects near-term impact on the conductor business owing to GST implementation, which coupled with the transition impact of moving production to new factories at Odisha and rise in domestic competition in conductor business is likely to suppress FY18 profitability. While management expects a healthy improvement in cables business on the back of strong demands from solar, railways and defence segment. We have revised our earnings estimates for FY18 and rolled over the earnings to FY19 and have a Buy rating on the stock with revised price target of Rs.896 which is 15x FY19E EPS (maintaining earlier multiple) of Rs.59.7. Any revision in the stock price would depend upon the change in crude oil price, order inflow, and general business momentum. *CMP as on 6 July 2017

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Daily closing price for last 3 years of Apar Inds.

Source: Bloomberg

Key Details

52 week H/L(Rs) 909/503

Book Value (Rs) YTD 235

FV (Rs) 10.0

PE (X) (TTM) 16.8

Dividend Yield (%) 0.8

Shareholding Pattern (%) on 31 March 2017

Promoter 57.96

Institutions 26.77

Public 15.27

Total 100.00

PE (X)

FY17 FY18E FY19E

16.8 14.9 12.9

Bharat Electronics Ltd. *CMP: Rs.172, Mkt Cap: Rs.379.72 bn

Background Bharat Electronics Ltd. (BEL) was established at Bangalore, India, by the Government of India under the Ministry of Defence in 1954 to meet the specialised electronic needs of the Indian defence services. Over the years, it has grown into a multi-product, multi-technology, multi-unit company servicing the needs of customers in diverse fields in India and abroad. BEL’s segments are Radars, Military Communication, Naval Systems, Weapon Systems, Electronic Warfare, Avionics, C4I Systems, Electro-optics, Tank Electronics, Gun up-grades, Civilian Equipments & Systems and Components. BEL’s joint venture companies include GE BE Private Ltd. and BEL Multitone Private Ltd. BEL is among an elite group of public sector undertakings which have been conferred the Navratna status by the Government of India.


Promoter 68.19

Institutions 24.38

Public 7.43

Total 100.00




16A 73,538 3.7 13,893 19.3 13,368 6.0 11.7 28.7 0.5 17A 86,540 12.0 17,726 20.5 15,234 6.8 14.0 25.2 1.0 18E 1,03,848 20.0 20,740 20.0 17,246 7.7 13.2 22.3 1.1 19E 1,19,425 15.0 24,448 20.5 19,669 8.8 14.0 19.5 1.1

View: BEL is a niche public sector play with strong and readily available manufacturing base in the defense space compared to various other players which are at planning stage of setting up the capacity. We expect BEL to benefit significantly from the Government‟s increased focus on the defence sector coupled with higher emphasis on the indigenization. On account of “Make in India” and “Strategic Partnership Model” initiative by the Government of India, we believe that order inflows will also accelerate in FY18/19 led by more thrust from the government for modernization of defense equipment. Increased focus on R&D, move towards being system integrator and increased focus on outsourcing are steps in the right direction to increase long term sustainability of business. Strong execution in the recent past, robust order inflow guidance and strong balance sheet strength works in the favour of BEL. Current order book to bill ratio of 4.6x its FY17 revenue provides strong revenue visibility. We have revised our earnings estimates for FY18 and rolled over the earnings to FY19 and have a Buy rating on the stock with a revised target price of Rs.196 at 18x (maintaining earlier multiple) FY19E EPS of Rs.8.8 and adding cash per share of Rs.38. Any revision in target price would depend upon the general business momentum, changes in order inflow, execution issues and rollover of earnings to next financial year. *CMP as on 6 July 2017

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Daily closing price for last 3 years of Bharat Electronics

Source: Bloomberg

Key Details

52 week H/L(Rs) 187/119

Book Value (Rs) YTD 45.9

FV (Rs) 1

PE (X) (TTM) 25.2


PE (X)

FY17 FY18E FY19E

25.3 22.3 19.5

Bharat Heavy Electricals Ltd. *CMP: Rs.136, Mkt Cap: Rs.331.16 bn Background Bharat Heavy Electricals Ltd. (BHEL) is an integrated power plant equipment manufacturer and one of the largest engineering and manufacturing company of its kind in India engaged in the design, engineering, manufacture, construction, testing, commissioning and servicing of a wide range of products and services for the core sectors of the economy, viz. Power, Transmission, Industry, Transportation (Railway), Renewable Energy, Oil & Gas and Defence with over 180 products offerings to meet the needs of these sectors. Establishment of BHEL in 1964 was a breakthrough for upsurge in India's Heavy Electrical Equipment industry. Consistent performance in a highly competitive environment enabled BHEL attain the coveted 'Maharatna' status in 2013. BHEL also has a widespread overseas footprint in 76 countries with cumulative overseas installed capacity of BHEL manufactured power plants nearing 10,000 MW including Malaysia, Oman, Libya, Iraq, the UAE, Bhutan, Egypt and New Zealand.


Promoter 63.06

Institutions 32.32

Public 4.62

Total 100.00



Y/E Sales Growth EBITDA Margin PAT EPS Growth P/E Div. Yield 31-Mar Rs. Bn (%) Rs. Bn (%) Rs. Bn Rs. % X %

14A 395.7 (18.3) 45.8 11.6 35.0 14.3 (47.0) 9.5 3.4 15A 307.9 (22.2) 25.3 8.2 14.5 5.9 (58.5) 22.9 1.5 16A 255.2 (17.1) (13.6) (5.3) (7.2) (2.9) NA NA 0.5 17A 282.5 10.7 11.0 3.9 4.8 1.9 NA 73.1 0.9

View: BHEL‟s performance improved significantly during FY17 led by ramping up of execution and cost control initiatives taken by the company. The long-term growth of BHEL‟s earnings would be supported by its large size, execution capability and strong balance sheet. The Company sounded positive on the large opportunity coming from solar space due to government‟s large announcements on the renewable sources of energy. Further, with the government‟s clear focus on manufacturing sector by the initiative like “Make in India”, the company indicated of new opportunity in railways and defence sector. We think that as its execution picks up, we can see strong margin expansion over the medium term. Also, we expect the company to benefit from improvement in State Electricity Boards balance sheet due to „UDAY‟ reform scheme, new tariff policy & reducing interest rate cycle. We have a Buy rating on the stock with a price target of Rs.198, based on price/book value multiple of 1.5x (maintaining earlier multiple) of FY17 book value of Rs.132. Key monitorable for our earnings expectations would be improving order flows, faster execution and rollover to next financial year. *CMP as on 6 July 2017

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Daily closing price for last 3 years of BHEL

Source: Bloomberg

Key Details

52 week H/L(Rs) 183/116


FV (Rs) 2.0

PE (X) (TTM) 73.1


PE (X)

FY16 FY17

NA 73.1

CG Power and Industrial Solutions Ltd *CMP: Rs.83, Mkt Cap: Rs.53.11 bn

Background

CG Power and Industrial Solutions Ltd (CG), formerly known as Crompton Greaves Ltd, provides end-to-end solutions, helping its customers use electrical power effectively and increase industrial productivity with sustainability. CG was established in 1937 in India; and, since then the Company has been a pioneer and has retained its leadership position in the management and application of electrical energy. Its unique and diverse portfolio ranges from transformers, switchgear, circuit breakers, network protection & control gear, project engineering, HT and LT motors, drives, and turnkey solutions in all these areas; thus enhancing the many aspects of industrial and personal life. This portfolio has been structured into three SBUs - Power Systems and Industrial Systems.


Promoter 34.42

Institutions 51.68

Public 13.90

Total 100.00



Y/E Sales Growth EBITDA Margin PAT EPS Growth P/E Div.Yield 31-Mar Rs Bn (%) Rs Bn (%) Rs Bn (Rs) (%) (x) (%)

16A 55.9 1.6 4.3 7.7 2.3 3.6 (38.7) 22.8 0.0 17A 61.2 9.4 4.7 7.7 1.8 2.9 (19.2) 28.3 0.0 18E 68.6 12.0 6.3 9.2 2.5 3.9 35.0 21.1 0.0 19E 78.2 14.1 7.2 9.2 2.8 4.4 11.6 18.7 0.0

View: Q4FY17 numbers were a mixed set of numbers with marginal decline in EBIT margins across the segments due to the sharp rise in the raw material cost and delayed pass on of the same to the customers. The company continues to focus on restructuring (sale of international business) the key businesses of the company. Although the sale of international business was called off for the second time, the company is now restructuring its international business into five geographic segments, Indonesia, Hungary, Belgium, USA and Ireland, as this would make it easy to sell in parts as potential buyers won‟t be interested in buying the entire operation given its wide geographic reach. However, management has decided to retain the Indonesia business given the improved performance and positive outlook for the same. We think that the restructuring is likely to allow increased management bandwidth for the domestic business, which has a huge opportunity given the increased visibility on domestic T&D and Railway capex. The order inflow from Railways has been strong and is expected to continue with similar trajectory, which will be the key revenue driver for the segment. We have revised the earnings estimates for FY18 and introduced earnings for FY19 and have Hold rating on the stock with a revised target price of Rs.79 which is 18x FY19E EPS (multiple upgraded from 14 to 18 on account of expectation of improved profitability on account of International business restructuring) of Rs.4.4. Any change in the earnings/target price would depend upon the order inflow & execution, change in the management‟s strategy on the international business and general business momentum. *CMP as on 6 July 2017

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Daily closing price for last 3 years of CG Power

Source: Bloomberg

Key Details

52 week H/L(Rs) 97/56


FV (Rs) 2.0

PE (X) (TTM) 28.3


PE (X)

FY17 FY18E FY19E

28.3 21.1 18.7

Cummins India Ltd. *CMP: Rs.914, Mkt Cap: Rs.251.91 bn

Background Cummins in India, a power leader, is a group of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, air handling, filtration, emission solutions and electrical power generation systems. Its technology and pioneering initiatives are bringing innovative solutions and dependable services at the best possible value to users across the country. Its high performance outlook is based on customer focus, integrity and capability of its people. Part of the US company Cummins Inc., Cummins in India is a Group of eight legal entities across 200 locations in the country. Cummins India Ltd., the country’s leading manufacturer of diesel and natural gas engines is one of the eight legal entities of the Cummins Group in India. Comprising of four business units - Industrial Engine, Power Generation, Distribution, and Automotive, Cummins India Ltd. is also the largest entity of the Cummins Group in India.


Promoter 51.00

Institutions 35.83

Public 13.17

Total 100.00


Earnings Summary (Standalone)

Y/E Sales Growth EBITDA Margin Net Profit EPS Growth P/E Div. Yield 31-Mar Rs. Mn (%) Rs. Mn (%) Rs. Mn Rs. % X %

16A 47088 6.9 7751 16.5 7543.0 27.2 (4.0) 33.6 1.5 17A 50773 7.8 8018 15.8 7346.3 26.5 (2.6) 34.5 1.6 18E 55973 10.2 9515 17.0 8877.5 32.0 20.8 28.6 2.2 19E 63158 12.8 10737 17.0 9963.5 36.0 12.2 25.4 2.4

View: Cummins delivered weak results for Q4FY17 due to lower exports and unfavorable product mix, which impacted the margins. The company has suggested that it could see some margin uptick as it corrects the product mix issue, while exports could continue to remain a challenge in the near term. We believe that as the economic growth momentum picks up and investment cycle picks up, Cummins could be among the biggest beneficiaries in its sector owing to its strong competitive positioning, superior brand recall, strong parentage and solid product innovations. The company also seems have strength to take advantage of any new technology in the powergen business (like Solar). We continue to like the strong cash rich balance sheet (Rs.7.9 bn cash and investments as on Q4FY17) and the high capital efficiency of the company (20% ROE and 26% ROCE in FY17), which we believe could be improved upon over the medium term. The company would also be a potential beneficiary from strong outsourcing orders by its parent. In the near to medium term the growth of the company would be hinged largely on the growth in Domestic markets, which is showing signs of pickup. We have revised our earnings estimates for FY18 and rolled over the earnings to FY19, and recommend Buy rating on the stock with a price target of Rs.1079 at 30x (10% discount to last 3 year average multiple of 33x) FY19E EPS of Rs.36. Any changes in our earnings/price objective would hinge on the pace of economic recovery, changes in the margin profile and general business momentum. *CMP as on 6 July 2017

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Daily closing price for last 3 years of Cummins India

Source: Bloomberg

Key Details

52 week H/L(Rs) 1096/748


FV (Rs) 2.0

PE (X) (TTM) 34.5


PE (X)

FY17 FY18E FY19E

34.5 28.6 25.4

KEC International Ltd. *CMP: Rs.256, Mkt Cap: Rs.68.75 bn

Background KEC was incorporated in 1945 as Kamani Engineering Corporation by the RPG Group. KEC is a Global Power Transmission Infrastructure major for Engineering Procurement and Construction (EPC) projects. It has presence in the verticals of Power Transmission & Distribution (T&D), Cables, Railways, Water, Renewables (Solar Energy) and Civil. Globally, the company has powered infrastructure development in more than 61 countries. KEC is a leader in Power Transmission EPC projects and has more than seven decades of experience. Over the years, it has grown through organic as well as inorganic route.


Promoter 50.86

Institutions 32.45

Public 16.69

Total 100.00


Earnings Summary – Consolidated

Y/E Revenue Growth EBITDA Margin Net Profit EPS Growth P/E Div. Yield 31-Mar Rs Bn (%) Rs Bn (%) Rs Bn Rs % X %

16A 85.2 0.6 6.9 8.1 1.5 5.8 (5.7) 44.5 0.4 17A 85.8 0.8 8.2 9.5 3.0 11.9 106.1 21.6 0.6 18E 96.6 12.5 9.2 9.5 3.6 13.9 16.9 18.5 0.6 19E 108.6 12.5 10.3 9.5 4.1 16.0 15.1 16.0 0.6

View: International T&D segment after seeing a subdued performance in last few years has picked up recently, with revenue growing by 21.0% YoY during FY17. Management expects order inflow in the domestic Transmission and Distribution segment (T&D) to continue in from orders from State Electricity Boards and Power Grids ordering in the North-Eastern part of India. Indian railways long term plan to electrify ~35000 kms of railway lines by FY20 improves the revenue visibility for the railway segment for KEC, given the leadership position with ~25% market share in the railway overhead electrification segment. We believe, strong order book growth (up by 33% YoY at the end of FY17) led by sharp growth in the order inflow (up by 42% YoY for FY17) has led to improvement in the revenue visibility for next 18-24 months. We believe, improving order inflow scenario, reducing debt profile, diversification of overall company revenue and inter segment revenue via diversified client base coupled with improving ROCEs and ROE and controlling receivables cycles going ahead would drive profitability for the company going ahead. We have revised the earnings estimates for FY18 and FY19 upwards the strong order inflow and revenue guidance by the management and have a Buy rating on the stock with the revised target price of Rs.288 based on PE multiple of 18x (maintained the earlier multiple) FY19E EPS of Rs.16.0. Any earning/target price revision would depend on the ordering and tendering activities by domestic T&D players, improvement in market share and changes in general business momentum. *CMP as on 6 July 2017

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Daily closing price for last 3 years of KEC International

Source: Bloomberg

Key Details

52 week H/L(Rs) 284/111


FV (Rs) 2.0

PE (X) (TTM) 21.6


PE (X)

FY17 FY18E FY19E

21.6 18.5 16.0

Larsen & Toubro Ltd. *CMP: Rs.1697, Mkt Cap: Rs.1592.08 bn Background Larsen & Toubro (L&T) Ltd. is technology, engineering, construction and manufacturing company. The company operates in 5 segments includes Hydrocarbon, IT & Technology Services, Financial Services, Developmental Projects and Others comprising Realty, Shipbuilding, Ready Mix Concrete, Mining and Aviation. While its segments at the standalone level: Infrastructure, Power, Metallurgical and Material, Handling, Heavy Engineering, Electrical and Automation, Machinery and Industrial Products.


Promoter 0.00

Institutions 56.02

Public 43.98

Total 100.00


Earnings Summary (Standalone)

Y/E Sales Growth EBITDA Margin Net Profit EPS Growth P/E Div. Yield 31-Mar Rs Bn (%) Rs Bn (%) Rs Bn Rs % X %

16A 638 11.9 58 9.1 50 48.9 (9.8) 34.7 1.1 17A 663 3.9 64 9.7 48 51.0 4.3 33.3 1.1 18E 743 12.0 75 10.1 54 57.7 13.2 29.4 1.1 19E 839 13.0 91 10.8 69 73.9 28.0 24.1 1.1

View: L&T is India's largest Engineering & Construction Company. L&T is exposed to several levers across business/geographic segments and has emerged as the Engineering & Construction partner of choice in India, which provides a robust foundation to capitalize on the next leg of investment cycle. The management continues to be optimistic about the potential opening up of the defense sector which could be a big opportunity for L&T as it is ready with capacity and expertise to grab such opportunities. Under its five-year strategic plan to FY21, L&T aims to grow sales at a 12-15% CAGR to reach Rs.2 trillion by FY21, increase margins to 11.2%, unlock value via asset sales to drive ROEs and ROCEs and reduce the working capital requirement. Overall, investment cycle in private sector is expected to recover in the medium term which is likely to drive the order inflow for the company. We have revised the earnings estimates for FY18 and introduced earnings for FY19 and have a Buy rating on the stock by with a revised target price of Rs.1965 (20x FY19E standalone EPS of Rs.73.9 + Subsidiary value of Rs.487/share). Any revision in the target price would depend upon changes in order inflow, execution, profitability in subsidiaries, rollover to the next financial year, management guidance and general business momentum. *CMP as on 6 July 2017

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Daily closing price for last 3 years of Larsen & Toubro

Source: Bloomberg

Key Details

52 week H/L(Rs) 1834/1295


FV (Rs) 2.0

PE (X) (TTM) 33.3


PE (X)

FY17 FY18E FY19E

33.3 29.4 24.1

Voltas Ltd. *CMP: Rs.470, Mkt Cap: Rs.154.52 bn

Background Voltas Ltd. (Voltas) is India's one of largest air conditioning company, and one of the world's premier engineering solutions providers and project specialists. Voltas Ltd. offers engineering solutions for a wide spectrum of industries in areas such as heating, ventilation and air conditioning, refrigeration, electro-mechanical projects, textile machinery, mining and construction equipment, water management & treatment, cold chain solutions, building management systems, and indoor air quality. The Company’s operating subsidiaries include Universal Comfort Products Ltd., Auto Aircon (India) Ltd., Saudi Ensas Company for Engineering Services WLL, Weathermaker Ltd. and Lalbuksh Voltas Engineering Services & Trading LLC.


Promoter 30.30

Institutions 47.18

Public 22.52

Total 100.00




16A 57,198 10.4 4,330 7.6 3,871 11.7 0.7 40.2 0.6 17A 60,328 5.5 5,791 9.6 5,090 15.4 31.5 30.5 0.6 18E 67,994 12.7 6,304 9.3 5,897 17.8 15.9 26.4 0.7 19E 78,784 15.9 7,305 9.3 6,616 20.0 12.2 23.5 0.7

View: Voltas Ltd is one of India‟s leading engineering solution providers. The business portfolio of the company comprises of providing Heating, Ventilating and Air conditioning & Electro Mechanical Project (EMP). On the Unitary Cooling Product (UCP) segment, the company continues to remain market leader (market share of 21.4% in Q4FY17) with the focus on margin expansion through better product quality & improved revenue mix. Company plans to foray into other consumer durable segments like refrigerator, washing machine and microwave via Joint Venture with a Turkish major “Arcelik”. We believe existing dealer and channel presence via ACs segment would augment well for the company for growth into other durable goods as well. On the EMP, the margin is expected to see improvement as slow moving orders move out of the backlog and newer projects with better profitability (threshold margins of >5%) come into execution. The company continues to have strong balance sheet and cash flow generation capability which would aid well for the capital requirement for the entry into other consumer durable products. We have revised our earnings estimates for FY18 and rolled over the earnings to FY19, and have a Buy rating on the stock with a revised price target of Rs.600 which is 30x (last three years average PE) FY19E EPS of Rs.20. Any change in earnings/price target would depend upon the order inflow/execution in domestic and international markets, margin improvement; scale up of the new JV, general business momentum and rollover to the next financial year. *CMP as on 6 July 2017

0

100

200

300

400

500

600

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

May

-16

Jul-

16

Sep

-16

No

v-1

6

Jan

-17

Mar

-17

May

-17

Jul-

17

Daily closing price for last 3 years of Voltas

Source: Bloomberg

Key Details

52 week H/L(Rs) 515/287

Book Value (Rs) YTD 77.5

FV (Rs) 1.0

PE (X) (TTM) 30.5


PE (X)

FY17 FY18E FY19E

30.5 26.4 23.5

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Disclosures: Research analyst or his/her relatives or HDFC Bank or its associates may have financial interest in the subject company in ordinary course of business. Research analyst or his/her relatives does not have actual/ beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: HDFC Bank or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report. Research analyst or his/her relatives or HDFC Bank or its associates may have other potential / material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of the research report. Subject company may have been client of HDFC Bank or its associates during twelve months preceding the date of publication of the research report. HDFC Bank or its associates may have received compensation from the subject company in the past twelve months. HDFC Bank or its associates may have managed or co-managed public offering of securities for the subject company in the past twelve months. HDFC Bank or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. HDFC Bank or its associates may have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months. HDFC Bank or its associates has not received compensation or other benefits from the subject company or third party in connection with the research report. Research analyst has not served as an officer, director or employee of the subject company. Neither research analyst nor HDFC Bank has been engaged in market making activity for the subject company. Three year price history of the daily closing price of the securities covered in this note is available at www.nseindia.com and www.bseindia.com.

Rating Expected to

Buy Appreciate more than 10% over a 12 to 15 month period

Hold Appreciate below 10% over a 12 to 15 month period

Under Review Rating under review

Exit Exited out of the Model Portfolio

Rating Interpretation

http://www.bseindia.com/

iip growth in fy17 shows fast growth in last five years · 2017-07-10 · capital goods sector...

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