Religare-Capital Goods - Sector Report - June 2010

Capital Goods Sector Report 21 June 2010

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Misal Singh Arun Aggarwal

(91-22) 6766 3466 (91-22) 6766 3440

[email protected] [email protected]

Sector Report 21 June 2010

Recommendation snapshot Company CMP Rating Target

ABB 866 Hold 850

BHEL 2,383 Hold 2,400

BGR Energy 737 Hold 700

Crompton Greaves 260 Hold 285

Cummins India 607 Hold 575

Jyoti Structures 154 Buy 185

Kalpataru Power 1,033 Hold 1,000

KEC International 474 Hold 500

Siemens India 731 Buy 925

Suzlon Energy 57 Sell 45

Techno Electric 289 Buy 400

Thermax 710 Hold 710

Voltas 189 Buy 220

Key Catalyst

Sector Key catalyst Impact

Additional capacity creation in the BTG equipment segment

-ve Power generation equipment Ordering of 800 MW super critical

BTG equipment +ve

Power generation contracting

Capacity creation in the EPC and BoP segments

+ve

Relaxation of prequalification norms by PGCIL for 765 kV transmission equipment

+ve Power transmission equipment Stronger Rupee to reduce the price

competitiveness of Chinese manufacturers

+ve

Capital Goods Realign for the change ahead

We believe the dynamics in the capital goods sector are likely to undergo a change. In our view, the sector is in a stage of its cycle where growth and returns are still exciting. However competition is likely to drive down returns over the medium to long term in select segments. We believe that over the next two years, companies with a superior product profile and contracting abilities are likely to outperform, as intensifying competition is likely to weed out weak players. Our top pick in the sector is Siemens India (SIEM) based on its superior product profile, positive changes to business model and hence potential to surprise on the upside. We initiate coverage on SIEM with a one year target price of Rs 925, implying a 27% upside from current levels. Our top mid-cap idea is Voltas (VOLT), as we believe valuations could re-rate with improvement in order flows. We initiate coverage on BHEL with a Hold recommendation (target price of INR 2400) as we believe; even as growth in likely to taper down from FY13E, the execution profile is likely to remain robust over the short to medium term.

Growth across the value chain: At FY07-end, India’s power generation capacity stood at ~132.3GW. Over FY08-FY17, various power developers are proposing to add power generation capacity of ~150 GW, more than the generation capacity added in the last 60 years. We believe this statistic captures the essence of the future growth in India’s power sector. On our current estimates, we expect revenues to grow at an average CAGR of ~19% over the FY10-FY12E across the power equipment and contracting value chain.

Competition high in select segments: Competition has already intensified in the transmission equipment sector. This is corroborated by the Herfindahl Hirschman index for the transmission tower EPC business which has moved from 0.25 to 0.08,thus denoting high concentration in the sector (low concentration >0.2, high concentration <0.1). While we do not see the same intensity of competition in the generation equipment sector over the short term, competitive activity is likely to intensify in the long-term.

Leaders to outperform: In our view higher competitive intensity is likely to impact margins and hence returns over the next two years. We expect earnings to grow at an average CAGR of ~16% (lower than revenues growth) over the FY10-FY12E across our coverage. However we expect BGR Energy (BGR) and SIEM to outperform, based on the strength of their product profiles and contracting abilities. We expect the earnings for SIEM to grow at a CAGR of ~22% over FY10-FY12E, highest in the transmission equipment segment.

Valuations, advocate a selective approach: Our favourite stocks in the sector are those, where we believe business models will strengthen, leading to valuations rerating or earnings upgrades to cons. estimates. Given the high growth and negative cash flows in explicit forecast period, we prefer the P/E and EV-EBITDA/ EBITDA growth (EVEG) valuation metrics for the sector. At our estimates, SIEM trades at a P/E of 25.8x and 21.1x for FY11E and FY12E respectively. The stock has traded in an average one-year forward PE band of ~20x-40x over the last five years. Even as we like the business models of Cummins India (KKC) and Thermax (TMX), based on current valuations, we initiate coverage on TMX and KKC with a Hold. TMX is trading at a P/E of 26.3x and 20.1x, and KKC at 23.6x and 21.2x, for FY11E and FY12E respectively.

Contents

Section Page No.

Capital Goods

Bright long-term prospects 2

Heightened competition to impact margins post FY12E 2

Power generation: wide scope, varied dynamics 4

Power transmission outlay set to surge 5

Power transmission sees higher order flows, competition 5

Outlook and Valuations 7

Key risks 12

Companies

ABB Ltd 14

Bharat Heavy Electricals Ltd 21

BGR Energy Systems Ltd 26

Crompton Greaves Ltd 31

Cummins India Ltd 36

Jyoti Structures Ltd 41

Kalpataru Power Transmission Ltd 46

KEC International Ltd 51

Siemens Ltd 56

Suzlon Energy Ltd 67

Techno Electric & Engineering Company Ltd 72

Thermax Ltd 77

Voltas Ltd 82



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Fig 1 - Comparative Valuation Sheet

Sales EBITDA margin (%) EPS RoCE EV/EBITDA PE CMP

(Rs.) Rating Target

price % upside/

(Downside)

P/E at target price FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Power generation

BHEL 2,383 Hold 2,400 1% 17.8 335,728 404,834 504,512 18.6 19.0 19.4 88.1 107.0 135.2 40.0 40.1 41.4 17.0 13.8 10.9 27.1 22.3 17.6

BGR Energy 737 Hold 700 -5% 15.5 30,779 41,413 51,055 11.3 11.3 11.3 28.0 36.7 45.3 22.0 20.9 19.7 15.5 11.5 9.4 26.3 20.1 16.3

Suzlon 57 Sell 45 -22% 26.8 207,792 210,409 234,531 4.5 5.0 8.7 (7.7) (3.4) 1.7 1.1 1.5 5.5 23.3 20.7 10.8 - - 34.2

Techno Electric 289 Buy 400 39% 14.4 7,066 8,053 9,521 21.7 20.9 19.9 21.5 24.6 27.7 76.5 74.2 51.1 9.7 8.9 7.9 13.4 11.7 10.4

Thermax 710 Hold 710 0% 20.1 37,699 44,472 57,584 11.6 11.5 11.7 23.9 27.0 35.4 44.0 45.7 50.1 18.2 15.5 11.8 29.7 26.3 20.1

Power transmission

ABB 866 Hold 850 -2% 26.3 80,204 94,597 109,269 9.6 9.9 10.0 22.7 27.6 32.3 27.1 28.3 27.9 23.1 18.9 16.3 38.2 31.4 26.8

Crompton Greaves 260 Hold 285 10% 20.1 91,409 99,216 109,914 14.0 13.3 13.0 12.9 13.0 14.2 38.5 33.4 31.3 13.1 12.6 11.7 20.2 20.0 18.3

Jyoti Structures 154 Buy 185 20% 12.2 20,185 23,889 27,295 11.9 11.5 11.5 11.2 13.1 15.2 28.3 27.6 28.1 6.3 5.5 4.8 13.7 11.8 10.2

Kalpataru Power 1,033 Hold 1,000 -3% 13.5 25,974 31,193 35,299 11.7 11.7 11.7 64.3 65.3 74.2 17.9 18.7 18.8 10.6 8.8 7.8 16.1 15.8 13.9

KEC International 474 Hold 500 5% 10.1 39,082 45,594 52,294 10.4 10.2 10.2 36.9 43.1 50.4 27.5 25.6 25.9 3.1 2.7 2.3 12.9 11.0 9.4

Siemens 731 Buy 925 27% 26.8 92,154 117,858 145,510 13.6 12.8 12.6 23.2 28.3 34.6 35.5 35.3 35.0 16.5 13.7 11.3 31.5 25.8 21.1

Others

Cummins 607 Hold 575 -5% 20.1 32,071 35,673 40,980 18.8 18.8 18.6 23.6 25.7 28.7 48.4 45.6 43.2 19.2 17.2 15.1 25.7 23.6 21.2

Voltas 189 Buy 220 17% 18.1 45,570 50,139 55,639 9.0 8.4 8.4 10.8 11.0 12.1 61.1 46.5 40.7 11.1 10.3 8.7 17.5 17.1 15.6

Source: Company, RCML Research


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Bright long-term prospects

India’s power generation capacity to burgeon While the power generation capacity addition in the 11th plan period has lagged targets, it needs to be noted that total capacity addition in the first three years of this plan (FY08- FY12E) is equal to the capacity added in the entire 10th period (FY03-FY07; ~27GW). More importantly, India is likely to add ~115GW of power generation capacity from FY2011E to FY2015E (according to best case estimates of our power utility team), led by contribution from independent power producers (IPP) and supplemented by central and state owned projects. Hence, over the 11th plan period and first few years of the 12th plan period, India is expected to double its power generation capacity (compared to the power capacity at the end of 10th plan i.e. March ’07).

Fig 2 - India’s installed power generation capacity

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

(MW)

Source: CEA

Fig 3 - Addition in India’s installed power generation capacity

0

5,000

10,000

15,000

20,000

25,000

30,000

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

(MW)

Source: CEA

Thus, the growth in the Indian power generation equipment market remains attractive over the medium to long term. Many entrants, enticed by the high growth potential of this market, have already announced their participation in this space.

Heightened competition to impact margins post FY12E

BHEL’s market share declines in face of increasing competition The 11th plan period (FY07-FY12) is likely to see an addition of ~60-65GW in power generation capacities, implying an annual capacity addition of ~12-13GW. BHEL increased its capacity to 10GW in December ’07 and to 15GW by March ’10. The company plans to further increase its capacity to 20 GW by the end of 11th plan.

BHEL had a market share of 61% in FY07, when India’s total installed power generation capacity was 132.3GW. However, the domestic BTG equipment market had started changing from H1FY07, as the state sharpened its focus on adding power generation capacities. From FY07, there was an increased presence of international players, primarily Chinese BTG vendors. Not surprisingly, BHEL’s market share has seen a progressive decline – the company’s market share stood at 59.2% at FY09-end, when India’s total installed capacity was at 147.9GW.

Impact of intensifying competition on new entrants to be lower In this backdrop, we feel it is imperative to analyse the entry of new players in the domestic equipment market. While the growth prospects of the BTG equipment market are bright over the 11th and 12th plan, we believe stiffening competition would lower profitability of BTG players in 12th plan. We, however, believe that instead of new entrants, the incumbent BHEL and Chinese manufacturers are likely to see a negative impact of this development on their business models. On closely observing the business models of new entrants, we note that their current margin profiles are significantly lower

India is likely to add ~115GW of power

generation capacity from FY11E to

FY15E

BHEL’s capacity is likely to increase by

more than ~3x in the 11th - from 6GW

in FY07 to 20GW in FY12E

India is likely to have annual capacity of

~35- 40GW in the BTG sector by

FY14E, implying a total capacity in

excess of 150 GW for the Twelfth plan

period. Compared to the demand side,

there is visibility of only 100GW for the

twelfth plan period.


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than BHEL. Hence, for these players, diversification would be a positive move – even if the BTG margins in the industry decline, they are still likely to be higher than the margin profile in their current businesses.

Fig 4 - BTG equipment industry- Margin profile of incumbents and new entrants

EBIT margins (%) RoCE (%)

FY09 FY10 FY09 FY10E

Incumbent

BHEL 14.5 17.3 32.5 40.0

New entrants

Larsen and Toubro (parent) 10.5 11.9 25.0 23.7

BGR Energy 10.4 11.0 17.9 22.1

Thermax 11.7 10.8 78.4 41.8


We believe that the decline in BHEL’s market share is likely to become more apparent from FY14E, as domestic capacities come on stream. We do not foresee a decline in the company’s market share over the next two years of the 11th plan. In fact, BHEL’s market share has increased in FY10E, as international manufacturers have been impacted by absence of after sales and service for some of their existing plants. Further, the execution for projects supervised by international contractors was slower in FY10E due to the non- availability of work force as the government enforced stricter visa norms.

Fig 5 - Details of new entrants in the BTG equipment industry

Sr. no New entrants Proposed capacity

(GW)

Capacity commissioning time

frame Recent orders secured

1

Larsen and Toubro-

Mistibushi Heavy Industries

For boilers, turbine and

generators

4 Boilers- December 2010

Turbine- June 2011

2X 660 MW- Jaypee Group at Singrauli-

Madhya Pradesh- Order valued at INR 20 bn

1600 MW- APGENCO, Andhra Pradesh-

Order valued at INR 15.5 bn

2 Bharat Forge- Alstom

For turbines and generators 5 By end of FY2012

3 JSW Group- Toshiba

For turbines and generators 3

Project was financially closed in

September 2009. First phase will

be commissioned by December

2011. Second phase by

H2FY2012.

4

BGR Energy- Foster

Wheeler- Hitachi

For boilers, turbines and

generators

3

5

Thermax- Babcock and

Wilcox

For boilers

3

Land acquisition in process. To

be operational by the end of

FY12E.

Source: RCML Research

After the new capacities come in, most likely by the end of 11th plan, India is likely to have annual capacity of ~35- 40 GW in the BTG sector, which implies at full capacity the BTG industry can cater to 175 GW – 200 GW of power generation capacity addition in a five-year plan period.

BHEL’s RoCE has improved substantially

in FY10E, driven by margin expansion

and revenues growth. We expect the

ratio to trend downwards from FY13E


4

Power generation: wide scope, varied dynamics

Power generation market heterogeneous in nature Even as the growth in the power generation equipment market looks attractive, it needs to be viewed with conjunction with other factors. Firstly, the power generation market is essentially heterogeneous in nature and can be classified on the basis of scope of work (typically wide and varied) in a power plant. Secondly, even as the growth is likely to remain uniform, market dynamics and companies differ across segments of work.

Fig 6 - Power generation plant- Scope of work

No Power generation- classification on scope of work

Key companies present in the segment Approximate share by value for setting up a power plant

1 Boiler- Turbine- Generator BHEL, Shangai Electric, Dongfang, Alstom 55- 60%

2 Coal handling system Elecon, TRF, L&T, Thyssenkrupp, Mc Nally Bharat, Techpro Systems 10- 12%

3 Ash handling system Indure, DC Industrial Plant Services, Mecawber Beekay 5- 6%

4 Cooling tower Paharpur Cooling Towers, Gammon India 1.5- 2%

5 Chimney NBCC, Gammon India, Simplex, North West Power Construction Co. China

1.5- 2%

6 Cooling water system WPIL, Jyoti Ltd, Kirloskar Brothers, Driplex, PE Erector, Walchandnagar Industries, Punj Lloyd

1.25- 1.5%

7 PT plant and DM plant Driplex, Ion Exchange, Degremont, VA Tech, GeoMiller, BGR Energy, Thermax, Doshion

0.75- 1.0%

8 HVAC system ABB, Blue Star, Voltas 0.75- 1.0%

9 Fuel oil system BHEL, Techno Electric, 1.0- 1.5%

10 Control system BHEL, ABB, Yogokawa, Emerson 0.3- 0.5%

11 Fire protection system Minimax GMBH, KIDDE India, Nohmi Bosai – Japan, Wormald Fire Systems, Kirloskar Brothers, Subhash Projects, Agnice Fire Protection

0.75%- 1.0%

12 Main plant civil work Era Construction, Nagarjuna Construction, Sunil Hitech, JMC, Gannon Dunkerly, Bridge & Roof

18- 20%


Scale to remain a constraint for BoP segment It is clear that the BTG equipment segment is the most attractive within the power generation equipment segment primarily due to its scale. Further, entry barriers in the BTG segment are higher due to technology issues and complexity of project execution. In fact, for most of the projects being developed by the state and private sector, the BTG equipment contractors are also the project supervisors who in turn sub-contract the remaining scope of the power plant to smaller contractors. Hence, they have the option of reducing their capital requirement in the project by increasing the capital requirements for BoP contractors.

Thus, even as capacities in the BoP segment remain constrained, not all BoP contractors are able to take advantage of the favorable dynamics. Some BoP contractors lose out as they accede to less favourable terms to obtain pre-qualifications. Others are impacted when trying to increase the growth profile of their businesses by taking higher than optimal number of orders. Hence, we believe that while the BoP segment is attractive due to its long-term growth potential, investors need to be selective and look at companies that have sound customer profiles, as the same directly impacts capital requirements in this business.

Even as the growth is likely to be high in

the BoP segment, it does not provide

the same scale as BTG. Further it is a

highly working capital intensive

business


5

Power transmission outlay set to surge Power transmission spend to increase by ~200% in 11th plan Driven by the addition in power generation capacities and upgrades in India’s existing power transmission network, the power transmission spend is expected to increase by ~200% in the 11th plan period over the 10th plan period.

Fig 7 - India’s power transmission spend under 10th and 11th five-year plans March YE, INR mn

2003 2004 2005 2006E 2007E Xth Plan total

2008E 2009E 2010E 2011E 2012E XI th Plan total

Central sector 28,004 24,849 32,815 41,985 57,660 185,313 91,020 146,092 175,714 179,556 164,394 756,775

PGCI 27,649 24,212 32,224 41,336 56,446 181,867 64,650 110,140 130,840 130,090 109,790 545,510

% change -12% 33% 28% 37% 15% 70% 19% -1% -16%

Others 355.3 637.1 591 649.2 1213.7 3,446 26,370 35,952 44,874 49,466 54,604 211,265

% change 79% -7% 10% 87% 2073% 36% 25% 10% 10%

State sector 32,863 36,235 43,194 50,109 90,454 252,854 94,238 134,993 149,043 100,898 82,449 561,622

Northern region 8,008 8,559 12,191 14,932 15,361 59,050 21,291 20,409 24,322 22,042 17,076 105,139

% change 7% 42% 22% 3% 39% -4% 19% -9% -23%

Western region 3,597 3,997 3,708 3,554 15,951 30,806 15,576 33,315 52,685 37,825 22,431 161,832

% change 11% -7% -4% 349% -2% 114% 58% -28% -41%

Southern region 10,173 12,479 12,944 13,501 33,352 82,448 36,665 39,125 17,100 15,171 25,563 133,625

% change 23% 4% 4% 147% 10% 7% -56% -11% 68%

Eastern region 10,585 10,643 13,150 16,869 23,407 74,655 15,944 35,164 48,108 19,075 11,963 130,254

% change 1% 24% 28% 39% -32% 121% 37% -60% -37% North Eastern region 501 557 1,201 1,253 2,384 5,896 4,762 6,980 6,829 6,785 5,415 30,771

% change 11% 116% 4% 90% 100% 47% -2% -1% -20%

Total All India 60,868 61,084 76,009 92,094 148,113 438,167 185,258 281,085 324,757 280,453 246,844 1,318,397

Source: CEA

India’s eastern/north eastern belt to see significant capacity addition The primary demand for power transmission in India comes from the western, northern and southern regions. However, going forward, sizable power generation capacities are likely to come up in the eastern and the north eastern part of the country due to coal deposits in eastern India. This implies higher outlay for the power transmission sector. Further, as hydro power capacities come up in north eastern India, the probability of an increase in the power transmission outlay in the future is high.

Fig 8 - Base power requirement and supply- Region wise Northern Western Southern Eastern N. Eastern Total Power supply

(MU) Deficit (%) Deficit (%) Deficit (%) Deficit (%) Deficit (%) Deficit (%)

Mar-07 -11.0 -15.6 -2.7 -3.0 -9.9 -9.6

Mar-08 -10.8 -15.8 -3.2 -4.9 -12.3 -9.9

Mar-09 -10.8 -16.0 -7.5 -4.6 -13.5 -11.0

Mar-10 -11.6 -13.7 -6.4 -4.5 -11.1 -10.1

Source: CEA

Power transmission sees higher order flows, competition

PGCIL awards orders of Rs 277.2bn in first three years of 11th plan Recently, the Power Grid Corporation of India (PGCIL) announced that it plans to float tenders of Rs 640bn in FY11E for nine high capacity corridors that will transmit power from new projects in Orissa, Sikkim, Jharkhand, Chhattisgarh, Madhya Pradesh, Andhra Pradesh, and Tamil Nadu. It may be noted that some of these power transmission projects are in addition to plans formulated by PGCIL at the beginning of the 11th plan period. This lends credence to the hypothesis that order inflows in the power transmission sector could be stronger than expectations.

Regionally, there is likely to be a power

demand supply imbalance in India over

the 11th and 12th plan periods, leading

to higher investment in power

transmission


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PGCIL has awarded orders worth Rs 277.2bn in the first three years of the 11th plan period; this implies that to meet its targets under the 11th plan, the company will have to give out an equal amount of orders over the next two years of the plan period. Even as the order flows from PGCIL, which can be taken as a proxy for the total investment in India’s power transmission sector, have increased from FY09 onwards, the competitive intensity in the sector has intensified.

Fig 9 - Power Grid Corporation order flows - Rs mn, March year end

FY08 FY09 FY10 Total

Conductor - 20,438 14,836 35,275

Consultancy 301 - - 301

Insulator 63 15,575 9,941 25,579

Miscellaneous 144 687 2,169 3,000

Pile foundation - 574 1,261 1,835

Rural electrification 66 20,919 2,668 23,653

Substation 6,194 23,006 20,720 49,920

Telecom 149 - - 149

Transformer 1,045 7,620 26,848 35,513

Transmission line tower EPC 7,027 49,552 45,489 102,068

14,989 138,371 123,934 277,294


Reducing HHI = increasing competitive intensity Competition in the power transmission equipment sector has increased significantly in the key packages of transmission line tower EPC and transformers. To demonstrate this, we compute the Herfindahl-Hirschman index (HHI) which measures the industry concentration. We note that the HHI for the transmission towers industry has reduced significantly over the last three years from FY08, indicating increase in competitive intensity.

Fig 10 - Increasing competition in power transmission orders

Transmission line tower EPC Transformers PGCIL order flow details

Total value of orders awarded

(INR mn)

Number of companies

awarded orders

Top 5 market

share (%) HHI(x)

Total value of orders awarded

(INR mn)

Number of companies

awarded orders

Top 5 market

share (%) HHI(x)

FY08 7,027 5 100.0 0.25 1044.685 2 100.0 0.50

FY09 49,552 20 68.2 0.11 7620.3663 7 94.7 0.27

FY10 45,489 23 54.1 0.08 26848.284 14 72.9 0.14

Source: RHH, Company

PGCIL has given orders worth Rs

277.2bn in the 11th plan period till

FY10, of which 36.8% of the orders are

for transmission line tower EPC and

18% are for substations

Transmission tower EPC has become an

extremely competitive business due to

low entry barriers. Additionally

transformers segment has become

competitive as Chinese manufacturers

have gained market share due to price

differential they compared to the Indian

manufacturers.


7

Outlook and Valuations Sound business models with high RoCE to outperform over the long term Driven by the capacity addition in the power generation and power transmission sectors, we believe we are in a secular growth trend in the sector over the medium to long term. However, in our view, at this stage of the cycle in the sector, investors need to look beyond growth. We believe the business models that generate high RoCE – driven by a strong product profile or low working capital requirement – are likely to outperform over the longer term. Further, we believe that for contracting companies, the working capital requirement is determined by the customer profile. Hence, in our opinion, customer profile is an additional indicator of a long-term sustainability of business models. The key risks that the business models of some contracting companies in the sector run is that of a) overdependence on selected customers and b) high working capital requirement that eventually leads to frequent capital raising activities.

We look at P/E valuations for the company in conjunction with the value creation potential of its business model. We believe that valuations of a business model generally lead its anticipated value creation. Consequently, we believe that valuations peak before the peak value is created (PVC) for a business model, as during the PVC period, competition in the sector increases – this is because various companies in the sector are attracted by the favorable industry dynamics. This works towards driving down the return profile of the industry.

Fig 11 - Valuations

Company P/E RoCE

Price

FY11E FY12E WACC

FY11E FY12E

Power generation

BGR Energy 737 20.1 16.3 10.8 20.9 19.7

BHEL 2,383 22.3 17.6 12.7 40.1 41.4

Suzlon 57 NM 34.2 11.0 1.5 5.5 Techno Electric and Engineering 289 11.7 10.4 11.5 23.1 22.8

Thermax 710 26.3 20.1 11.3 50.3 53.5

Power transmission

ABB 866 31.4 26.8 11.7 28.3 27.9

Crompton Greaves 260 20.0 18.3 12.6 33.4 31.3

Jyoti Structures 154 11.8 10.2 10.1 27.6 28.1

Kalpataru Power 1,033 15.8 13.9 9.4 18.7 18.8

KEC International 474 11.0 9.4 9.9 27.9 28.3

Siemens 731 25.8 21.1 12.1 35.3 35.0

Others

Cummins India 607 23.6 21.2 11.3 45.6 43.2

Voltas 189 17.1 15.6 12.1 46.5 40.7

Source: Company

We believe value creation potential of a business model is a function of its growth profile, profitability and scale. Thus we also look at the EV-EBITDA and EV-EBITDA/ EBITDA growth (EVEG) to ascertain the valuations given to the company at the operating level. Through EVEG, we can normalise for the vector of growth and ascertain the valuations given to the company for the profitability vector.

We thus believe valuations for BHEL

will de-rate as its value creation

potential is likely to decline from FY13E

Our hypothesis is that valuations for a

business model lead the anticipated

value creation of the business model

For SIEM , we believe valuations will re-

rate, due to likely improvement in the

business model as the German parent

realigns its strategy for the high growth

Indian subsidiary


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Fig 12 - EV/EBITDA vs EBITDA growth

ABB

CGR

KKC

SIEM

Voltas BGRBHELTEE

TMX

JYS

KPP

KECI

0

2

4

6

8

10

12

14

16

18

0 5 10 15 20 25 30EBITDA CAGR FY10-12E

EV/E

BIT

DA

( F

Y12

E)


Fig 13 - Valuation

Company Price EV/EBITDA (EV/EBITDA)/(EBITDA CAGR (FY10- FY12E))

RoCE

FY11E FY12E

EBITDA CAGR (FY10- FY12E)

FY11E FY12E FY11E FY12E

Power generation

BGR Energy 737 11.5 9.4 28.5% 0.40 0.33 20.9 19.7

BHEL 2,383 13.8 10.9 25.2% 0.55 0.43 40.1 41.4

Suzlon 57 20.7 10.8 46.9% 0.44 0.23 1.6 6.2

Techno Electric and Engineering 289 8.9 7.9 11.1% 0.81 0.71 74.2 51.1

Thermax 710 15.5 11.8 24.2% 0.64 0.49 45.7 50.1

Power transmission

ABB 866 18.9 16.3 19.2% 0.98 0.84 28.3 27.9

Crompton Greaves 260 12.6 11.7 5.9% 2.16 1.99 33.4 31.3

Jyoti Structures 154 5.5 4.8 14.4% 0.39 0.34 27.6 28.1

Kalpataru Power 1,033 8.8 7.8 16.5% 0.54 0.47 18.7 18.8

KEC International 474 5.5 4.8 14.7% 0.38 0.33 25.6 25.9

Siemens 731 13.7 11.3 19.2% 0.71 0.59 35.3 35.0

Others

Cummins India 607 17.2 15.1 12.5% 1.37 1.21 45.6 43.2

Voltas 189 10.3 8.7 6.7% 1.53 1.29 46.5 40.7

Source: Company, RCML research

SIEM currently valued at 25.8x/21.1x FY11/FY12 estimates - Buy At our current consolidated estimates, SIEM trades at a P/E of 25.8x and 21.1x for FY11E and FY12E respectively. The stock has historically traded between a PE band of 30x and 50x. The EV/ EBITDA for the stock is 13.7x and 11.3x. When normalised for growth, the EVEG ratio is at 0.71x and 0.59x for FY11E and FY12E respectively. We highlight that even as the EVEG for SIEM is in the top quartile, it needs to be noted that SIEM has one of the most technologically advanced product profile in the sector.

We believe that given the fundamental improvement in SIEM’s business model and the growth in the power transmission equipment market, the company trades at a discount to other peers of a similar pedigree in the industry. We initiate coverage on SIEM with a Buy recommendation and a target price of Rs 925, implying a target P/E of 27x based on normalised March FY12E consolidated EPS of Rs 34.6.


9

Fig 14 - Siemens P/E band chart

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BHEL’s declining fundamentals beyond FY13E to cap valuations – Hold At our estimates, BHEL is trading at a P/E of 22.3x and 17.6x for FY11E and FY12E respectively. The stock has historically traded between a PE band of 18x and 30x. The EV/ EBITDA for the stock is 13.8x and 10.9x. When normalised for growth, the EVEG ratio is at 0.55x and 0.43x for FY11E and FY12E respectively. Given the growth and returns profile over the next two years, BHEL is attractively valued. However, if we normalise for growth over FY10- FY13E rather than over FY10- FY12E we see that BHEL is trading at a EVEG 0.86x and 0.68x for FY11E and FY12E respectively. Hence, even as the growth is likely to remain robust over FY10- FY12E, we believe decline in growth, beyond FY13E is likely to cap valuations for the company. We initiate coverage on BHEL with a Hold rating and a target price of Rs 2400.

Fig 16 - BHEL P/E band chart

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11

Fig 24 - P/E ratios

1Yr Fwd P/E Ratio CMP (Rs.) Rating Target

price 5 yrs Avg 3Yrs Avg 1Yr Avg

P/E At Target

price Remarks

Power generation

BHEL 2,383 Hold 2,400 22.0 24.8 22.9 17.8 Growth to decline beyond FY12E, leading to de-rating

BGR Energy 737 Hold 700 NA NA 14.1 15.0 -

Techno Electric 289 Buy 400 11.0 11.2 10.0 14.4 The scalability of the business model has improved with the foray in the utility business

Thermax 710 Hold 710 18.5 20.4 22.0 20.1 -

Power transmission

ABB 866 Hold 850 33.9 37.3 29.8 26.3 The RoCE and growth profile of the business has declined over the past one year. Execution period of order backlog has increased.

Crompton Greaves 260 Hold 285 16.1 16.2 16.8 20.1 The margins have improved significantly over FY09 and FY10, leading to higher returns. Market share in domestic transmission market has increased

Jyoti Structures 154 Buy 185 14.1 14.0 12.3 12.2 The competition in the transmission tower EPC business has increased

Kalpataru Power 1,033 Hold 1,000 16.9 19.4 14.6 13.5 The competition in the transmission tower EPC business has increased

KEC International 474 Hold 500 11.3 11.9 10.7 10.1 The competition in the transmission tower EPC business has increased

Siemens 731 Buy 925 32.1 29.7 28.7 26.8 See limited downside from our target price

Others

Cummins 607 Hold 575 15.0 14.6 16.5 20.1 Profitability of the business model has improved substantially over the last two years

Voltas 189 Buy 220 18.5 18.3 17.0 18.1 -

Source: Company, Bloomberg, RCML Research


12

Key risks

If the increase in competition across the transmission and generation equipment and contracting businesses starts to play out earlier than our expectations the return and growth profiles across our coverage could be negatively impacted. We have already seen announcements of BTG capacity worth 11 GW in the recent past (BGR Energy, Thermax, NTPC-BHEL Power Projects Limited), compared to 6 GW of capacity that BHEL had at the end of FY07.

While we do not expect key rates to rise beyond the threshold level for contracting companies, it needs to be highlighted that since power contracting is working capital intensive business, any increase in interest rates beyond expectations is likely to impact the margins negatively.

Across BoP and transmission tower EPC segments, we have seen new entrants over FY08- FY10. It is critical that the projects undertaken by the new entrants proceed without delay as any delay in one part of the power infrastructure value chain is bound to impact others in the value chain.


13

Companies

ABB Ltd Initiating Coverage 21 June 2010

14

Profitability and return ratios

(%) CY09 CY10E CY11E CY12E

EBITDA margin 8.5 9.6 9.9 10.0

EBIT margin 7.7 8.9 9.3 9.4

Adj PAT margin 5.7 6.0 6.2 6.3

ROE 15.6 18.2 18.8 18.5

ROIC 19.8 25.1 26.1 25.7

ROCE 21.2 27.1 28.3 27.9

Financial highlights

(Rs mn) CY09 CY10E CY11E CY12E

Revenue 62,372 80,204 94,597 109,269

Growth (%) (8.8) 28.6 17.9 15.5

Adj net income 3,546 4,805 5,847 6,840

Growth (%) (35.2) 35.5 21.7 17.0

FDEPS (Rs) 16.7 22.7 27.6 32.3

Growth (%) (35.2) 35.5 21.7 17.0

ABB Ltd Rich valuations overshadow medium-term prospects: Hold

Even as ABB India’s (ABB) product profile in automation solutions is the strongest, its market share in the power transmission related products has declined in CY10. Moreover, while higher order inflows in the project business reinstate a positive outlook on revenues and earnings growth in CY10, we believe that the current valuations offer limited room for upside over the medium term. We initiate coverage on the stock with a Hold recommendation and a target price of Rs 850.

A clear leader in India’s automation solutions space: In terms of capabilities, ABB is the leader in the domestic automation solutions industry and has been consistently associated with prestigious products in this area. Besides automation, ABB also has a diverse offering in infrastructure verticals. However, we believe that ABB’s business model clearly derives strength from its leadership in automation solutions. Even as CY09 was a disappointing year for ABB, we note that the automation products business continued to grow and reported relatively better profit margins vis-à-vis other businesses.

Parent to focus on long-term business development in India: ABB Group, through an open offer, intends to increase the stake in ABB by 22.89% (48.59mn shares) to 75% at a cost of Rs 1bn (a 3.9% premium to current price). Through this open offer, the group aims to raise control in the Indian company – this would enable it to facilitate long-term development of the group’s business in India. At the current offer price, the parent is offering a P/E of 53.8x for CY09. The open offer has a minimum acceptance ratio of ~48%. At current price the break even for the open offer is at ~Rs 835. We believe the same is likely to provide support to the stock over the short term.

Limited upsides – Hold: In our view, the growth in ABB’s order backlog provides comfort in terms of its revenue growth for CY10E. However, while the outlook for revenues and earnings growth in CY10 remains positive, the current valuations leave little room for upside over the medium term. Further, given the high concentration of power systems in the order backlog at CY10E-end, positive surprises to earnings estimates, arising from short cycle orders, are unlikely. At our current estimates, ABB is trading at a P/E of 38.2x and 31.4x for CY10E and CY11E, respectively. The EV/EBITDA for the stock is at 23x and 19x; however, when adjusted for growth, the EVEG ratio is at 0.98x and 0.74x for CY10E and CY11E respectively. ABB’s valuations are one of the most expensive in the sector. We believe that given the decline in its RoCE, ABB is unlikely to trade close to its historical multiples. We initiate coverage on the stock with a Hold recommendation and a target price of Rs 850.

CMP TARGET RATING RISK

Rs 866 Rs 850 HOLD LOW

BSE NSE BLOOMBERG

500002 ABB ABB IN

Company data

Market cap (Rs mn / US$ mn) 183,417/3,953

Outstanding equity shares (mn) 212

Free float (%) 31.6

Dividend yield (%) 0.3

52-week high/low (Rs) 882 / 641

2-month average daily volume 466,879

Stock performance

Returns (%) CMP 1-mth 3-mth 6-mth

ABB India 866 4.4 0.5 14.1

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

38.231.4 26.823.1

17.7 15.0

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ABB Industry(x)

Valuation matrix

(x) CY09 CY10E CY11E CY12E

P/E @ CMP 51.7 38.2 31.4 26.8

P/E @ Target 50.9 37.4 30.8 26.3

EV/EBITDA @ CMP 33.7 23.2 18.9 16.3

RCML vs consensus CY10E CY11E

Parameter RCML Cons RCML Cons

Sales (mn) 80,204 94,597 90,594

EPS (Rs) 22.7 27.6 28.7


15

Investment rationale

An undisputed leader in India’s automation solutions industry In terms of capabilities, ABB India (ABB) is the leader in India’s automation solutions industry and has been consistently associated with prestigious products in this area. Besides automation, ABB also has a diverse offering in infrastructure verticals. However, we believe that ABB’s business model clearly derives its strength from the company’s leadership in automation solutions. ABB’s automation products find application across industries (see fig 2); hence, the company is essentially a play on the industrial capex.

Fig 25 - ABB India product and service offerings in the automation segment

No. Industry Offerings in the industry

1 Automotive Automotive components

Press automation

Power train assembly

Robotics service and support

2 Cement, Minerals & Mining

Cement Solutions

Open Pit Solutions

Minerals Solutions

Underground Solutions

3 Chemicals Supply of automation and electrical equipment for NPK fertilizer plants

Technology for : Air separation plants, Oxygen plants etc

Technology for composition and polymer units used in plastics

4 Marine Crane system, marine system & solutions

5 Metals Supply of coke plants, sinter plants, blast furnace,

Hot flat mills

Tandem cold rolling mills & cold rolling mills

6 Oil & Gas Fully integrated package of advanced refining process technologies

7 Power T&D FACTS (Flexible AC Transmission Systems),


Even as CY09 was a disappointing year for ABB, we note that the company’s automation products business continued to grow and report relatively better profit margins. Some of the key automation projects that ABB completed in this year are outlined in Fig. 2.

Fig 26 - Key automation projects completed by ABB in CY09

Name of the Company Projects name Brief description

Tata Steel Steel blast furnace Installation of Process control system, Instrumentation & controllers for plant automation

Lafarge Cement Trans-national single belt conveyor

Design, supply and installation of electrical and automation system, process control system, motors etc.

ONGC Enterprise wise automation project Complete instrumentation & automation

Tata Motors World truck project Transfer systems, Automation & controls


Set to benefit from focus on cost savings through global sourcing The ABB Group, ABB’s parent, has expanded its cost saving programme from US$ 2bn to US$ 3bn in Q4CY09. In CY10, the company intends to save US$ 1.5bn (50% of the cost savings target for CY10) by optimising global sourcing. We believe that ABB, with a lower cost base (arising from lower labour costs), could see higher revenue growth due


16

to its focus on global sourcing. During CY09, ABB India commissioned a production facility for ‘automation products’ – this facility is likely to support the parent’s global sourcing initiative. Some of ABB’s other recently commissioned capacities are:

Recently commissioned factories Remarks

LV motors and instrumentation facility at Faridabad

High efficiency motors from this factory are exported to Europe

HV machines, Power Transformers, Breakers and Auxiliary at Vadodara

HV machines and wind generators are exported worldwide

LV Drives and Systems , MV Drives and Electronics at Nelamangala

Positioned to serve South East Asia

Process automation at Peenya Process Automation factory & storage facility for automation components and spares

Revenue share of projects business to dwindle, support margin expansion The revenue share of ABB’s projects business has been consistently declining from CY06 onwards. While the projects business does result in scale, margins generated from this business tend to be lower. As ABB has exited the ‘rural electrification’ business, the share of projects business would continue to drop, and thereby support margin expansion.

Fig 27 - Revenues and order backlog

December year end CY06 CY07 CY08 CY09

Revenues break up (%)

Project business 51 53 48 43

Power systems 34 36 31 25

Process automation 17 17 18 18

Product business 49 47 50 56

Power products 28 26 27 29

Automation products 21 21 23 27

Order backlog (%)

Project business 66 66 61 63

Power systems 46 45 41 48

Process automation 20 21 21 15

Product business 34 34 39 37

Power products 28 26 26 23

Automation products 6 8 12 14


Outlook and valuations

Limited upsides at 31x CY11 earnings – Hold

In our view, the growth in ABB’s order backlog provides comfort in terms of revenue visibility for CY10E. However, even as the outlook for revenues and earnings growth remains positive in CY10, valuations at current level leave little room for upside over the medium term. Further, given the high concentration of power systems in the order backlog at CY10E-end, positive surprises to earnings estimates driven by short cycle orders are unlikely.

At our current estimates, ABB is trading at a P/E of 38.2x and 31.4x for CY10E and CY11E, respectively. The EV/EBITDA for the stock is at 23x and 19x; however, when adjusted for growth, the EVEG ratio is at 0.98x and 0.74x for CY10E and CY11E respectively. ABB’s valuations are one of the most expensive in the sector. We believe that given the decline in its RoCE, ABB is unlikely to trade close to its historical multiples. We initiate coverage on the stock with a Hold recommendation and a target price of Rs 850.


17

Fig 28 - ABB P/E band chart

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Key risks

Higher than expected order inflows in the short cycle business could result in higher revenues growth compared to our estimates, leading to upsides from current stock price levels

Improvement in execution beyond expectations in certain slow moving orders in the process automation segment could lead to higher earnings growth compared to our expectations.


19

Consolidated financials

Profit and Loss statement Balance sheet Y/E Dec (Rs mn) CY09 CY10E CY11E CY12E

Revenues 62,372 80,204 94,597 109,269

Growth (%) (8.8) 28.6 17.9 15.5

EBITDA 5,290 7,696 9,407 10,944

Growth (%) (31.7) 45.5 22.2 16.3

Depreciation & amortisation 485 555 598 651

EBIT 4,805 7,142 8,810 10,293

Growth (%) (34.9) 48.6 23.4 16.8

Interest 256 319 319 319

Other income 726 492 410 438

EBT 5,274 7,315 8,901 10,412

Income taxes 1,728 2,509 3,053 3,572

Effective tax rate (%) 32.8 34.3 34.3 34.3

Extraordinary items - - - -

Min into / inc from associates - - - -

Reported net income 3,546 4,805 5,847 6,840

Adjustments - - - -

Adjusted net income 3,546 4,805 5,847 6,840

Growth (%) (35.2) 35.5 21.7 17.0

Shares outstanding (mn) 211.9 211.9 211.9 211.9

FDEPS (Rs) (adj) 16.7 22.7 27.6 32.3

Growth (%) (35.2) 35.5 21.7 17.0

DPS (Rs) 2.2 2.2 2.2 2.2

Y/E Dec (Rs mn) CY09 CY10E CY11E CY12E

Cash and cash eq 5,241 2,328 4,122 6,200

Accounts receivable 28,577 35,158 41,467 47,899

Inventories 7,294 7,209 8,503 9,842

Other current assets 6,380 11,099 12,898 15,564

Investments 169 169 169 169

Gross fixed assets 8,793 10,706 11,706 12,706

Net fixed assets 6,731 8,090 8,492 8,841

CWIP 1,163 - - -

Intangible assets

Deferred tax assets, net 1 1 1 1

Other assets (1) - - -

Total assets 55,556 64,054 75,652 88,516

Accounts payable 29,869 35,091 41,387 47,956

Other current liabilities - - - -

Provisions 1,450 466 466 466

Debt funds - - - -

Other liabilities

Equity capital 424 424 424 424

Reserves & surplus 23,813 28,073 33,375 39,670

Shareholder's funds 24,237 28,497 33,799 40,093

Total liabilities 55,556 64,054 75,652 88,516

BVPS (Rs) 114.4 134.5 159.5 189.2

Cash flow statement Financial ratios Y/E Dec (Rs mn) CY09 CY10E CY11E CY12E

Net income + Depreciation 4,031 5,360 6,445 7,491

Non-cash adjustments 70 (1) - 0

Changes in working capital (631) (6,978) (3,106) (3,868)

Cash flow from operations 3,470 (1,618) 3,340 3,624

Capital expenditure (1,546) (750) (1,000) (1,000)

Change in investments 442 - - -

Other investing cash flow - - - -

Cash flow from investing (1,104) (750) (1,000) (1,000)

Issue of equity - - - -

Issue/repay debt (0) - - -

Dividends paid (496) (545) (545) (545)

Other financing cash flow (3) (0) 0 0

Change in cash & cash eq 1,867 (2,914) 1,794 2,078

Closing cash & cash eq 5,241 2,328 4,122 6,200

Economic Value Added (EVA) analysis Y/E Dec CY09 CY10E CY11E CY12E

WACC (%) 11.7 11.7 11.7 11.7

ROIC (%) 19.8 25.1 26.1 25.7

Invested capital (Rs mn) 24,237 28,497 33,799 40,093

EVA (Rs mn) 196,847 380,707 485,457 560,159

EVA spread (%) 8.12 13.36 14.36 13.97

Y/E Dec CY09 CY10E CY11E CY12E

Profitability & Return ratios (%)

EBITDA margin 9.6 9.9 10.0 10.0

EBIT margin 8.9 9.3 9.4 9.5

Net profit margin 6.0 6.2 6.3 6.3

ROE 18.2 18.8 18.5 18.9

ROCE 27.1 28.3 27.9 28.6

Working Capital & Liquidity ratios

Receivables (days) 171 145 148 149

Inventory (days) 55 45 42 42

Payables (days) 248 203 202 204

Current ratio (x) 1.5 1.6 1.6 1.6

Quick ratio (x) 1.3 1.4 1.4 1.4

Turnover & Leverage ratios (x)

Gross asset turnover 1.6 1.9 2.1 2.2

Total asset turnover 2.7 3.0 3.0 3.0

Interest coverage ratio 18.8 22.4 27.6 32.3

Adjusted debt/equity - - - -

Valuation ratios (x)

EV/Sales 2.9 2.2 1.9 1.6

EV/EBITDA 33.7 23.2 18.9 16.3

P/E 51.7 38.2 31.4 26.8

P/BV 7.6 6.4 5.4 4.6


20

Quarterly trend

Particulars Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10

Revenue (Rs mn) 14,061 15,148 14,689 19,016 14,753

YoY growth (%) -13.8 -2.7 -33.6 35.2 -2.6

QoQ growth (%) -36.4 7.7 -3.0 29.5 -22.4

EBITDA (Rs mn) 1,367 1,254 1,248 1,671 798

EBITDA margin (%) 9.7 8.3 8.5 8.8 5.4

Adj net income (Rs mn) 859 836 831 1,217 762

YoY growth (%) -34.8 -20.2 -57.0 41.7 -8.8

QoQ growth (%) -55.5 -2.7 -0.6 46.5 -37.4

DuPont analysis

(%) CY09 CY10E CY11E CY12E CY09

Tax burden (Net income/PBT) 67.2 65.7 65.7 65.7 67.2

Interest burden (PBT/EBIT) 109.8 102.4 101.0 101.2 109.8

EBIT margin (EBIT/Revenues) 7.7 8.9 9.3 9.4 7.7

Asset turnover (Revenues/Avg TA) 274.6 304.2 303.7 295.8 274.6

Leverage (Avg TA/Avg equtiy) 100.0 100.0 100.0 100.0 100.0

Return on equity 15.6 18.2 18.8 18.5 15.6

Company profile

ABB, incorporated in December 1949 as Hindustan Electric

Company, operates in two segments i.e. power technology and

automation technology, and offers its services and products to the

power transmission as well as other industries. Its power

technology segment provides solutions for power transmission,

power distribution, and control and protection systems for power

plants. Under the automation technology segment, it offers

products, systems, software, and services for automation and

optimization of discrete, process, and batch manufacturing

operations, and related services. These technologies include

measurement control, instrumentation, process analysis, drives and

motors, power electronics, robots, and low-voltage products.

Shareholding pattern

(%) Jun-09 Sep-09 Dec-09

Promoters 52.1 52.1 52.1

FIIs 12.3 11.9 10.1

Banks & FIs 24.0 24.5 26.5

Public 11.6 11.5 11.3

Recommendation history

Date Event Reco price Tgt price Reco

21-Jun-10 Initiating Coverage 866 875 Hold

Stock performance

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● Hold

Bharat Heavy Electricals Ltd Initiating Coverage 21 June 2010

21


(%) FY10E FY11E FY12E FY13E

EBITDA margin 18.6 19.0 19.4 19.3

EBIT margin 17.3 17.7 18.3 18.2

Adj PAT margin 12.8 12.9 13.1 13.2

ROE 29.9 29.4 29.8 27.5

ROIC 39.8 40.0 41.3 37.7

ROCE 40.0 40.1 41.4 37.8


(Rs mn) FY10E FY11E FY12E FY13E

Revenue 335,728 404,834 504,512 577,805

Growth (%) 25.6 20.6 24.6 14.5

Adj net income 43,106 52,391 66,159 76,463

Growth (%) 37.9 21.5 26.3 15.6

FDEPS (Rs) 88.1 107.0 135.2 156.2

Growth (%) 37.9 21.5 26.3 15.6

Bharat Heavy Electricals Ltd Fundamentals to weaken beyond 11th plan; Hold

We initiate coverage on BHEL with a Hold recommendation (target price of INR 2400) as we believe even as the company is likely to maintain market share over the short to medium term, competition is likely to intensify over the second half of the Twelfth plan period. Further, we believe that the growth is likely to slow down from FY13E onwards, as order inflows have peaked out and only inched up at a 3.2% CAGR over FY08-FY10. While the stock is likely to gain support from the execution profile of BHEL’s current order backlog, structurally lower growth is likely to lead to a de-rating in stock valuations over the long term.

Industry capacity utilisation to drop in 12th plan: BHEL is likely to have a BTG capacity of 20GW by FY12-end. However, with at least five domestic manufacturers likely to set up capacities in the BTG equipment market, competition in this space is likely to intensify. After the new capacities come in, most likely by the end of 11th plan, India is estimated to have an annual BTG capacity of 35-40GW. This implies that at full capacity, the BTG industry can cater to 175GW–200GW of incremental power generation capacity in a five-year plan period. However, India is likely to add capacities of ~60-65GW in the 11th plan and ~90-100GW in the 12th plan period. Thus, we believe that capacity utilisation levels for the industry are likely to decline, leading to margin pressures for BHEL over the long term.

Flat order inflows – forewarning to a lower growth period: BHEL’s order inflows have grown at a CAGR of 3.2% over FY08-FY10. We believe that flat order inflows over the past two years are likely to pressurise growth beyond FY12E. In the absence of growth, we believe that the value creation potential of the business is likely to decline, leading to a de-rating in valuations over the short to medium term.

Growth to slow down beyond FY12E, Hold: At our estimates, BHEL is trading at a P/E of 22.3x and 17.6x for FY11E and FY12E respectively. The stock has historically traded between a PE band of 18x and 30x. The EV/ EBITDA for the stock is 13.8x and 10.9x. When normalised for growth, the EVEG ratio is at 0.55x and 0.43x for FY11E and FY12E respectively. Given the growth and returns profile over the next two years, BHEL is attractively valued. However, if we normalise for growth over FY10- FY13E rather than over FY10- FY12E we see that BHEL is trading at a EVEG 0.86x and 0.68x for FY11E and FY12E respectively. Hence, even as the growth is likely to remain robust over FY10- FY12E, we believe decline in growth, beyond FY13E is likely to cap valuations for the company. We initiate coverage on BHEL with a Hold rating and a target price of Rs 2400.


Rs 2,383 Rs 2,400 HOLD LOW

BSE NSE BLOOMBERG

600103 BHEL BHEL IN

Company data

Market cap (Rs mn / US$ mn) 5,805,782 / 125,354


Free float (%) 27.9


52-week high/low (Rs) 2585 / 1923


Stock performance


BHEL 2,383 2.8 0.2 2.2

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

27.122.3

17.623.1

17.7 15.0

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BHEL Industry(x)

Valuation matrix

(x) FY10E FY11E FY12E FY13E

P/E @ CMP 27.1 22.3 17.6 15.3

P/E @ Target 27.2 22.4 17.8 15.4

EV/EBITDA @ CMP 17.0 13.8 10.9 9.5

RCML vs consensus

FY11E FY12E Parameter

RCML Cons RCML Cons

Sales (Rs mn) 404,834 410,626 504,512 495,025

EPS (Rs) 107 112.1 135.2 135.9


22

Gas based power plants orders to start flowing in: Going ahead the competition in the gas based thermal power plants is likely to be significantly lower than the coal based thermal power plants. We expect order inflows from gas based power plants to flow in from FY11E. However the margins in the same are likely to be lower as they are CKD units (completely knocked down) and hence the potential for value addition by the contractor is lower.

Execution to remain hampered by low capacity across value chain: BHEL has consistently disappointed on the execution front. We believe that given the paucity of quality contractors across the power generation contracting value chain, BHEL may not be able to compress its execution period in the 11th plan period. Inability to do reduce the execution period renders this important lever of growth ineffective for BHEL.

Fig 34 - BHEL P/E band chart

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Key upside risks

Pick up in execution: Execution is likely to pick up towards the end of the 11th plan period. While we have built in the same in our model, further pick up in execution, beyond expected levels, may lead to a strong quarterly performance; this can support stock price over a longer-than-expected period.

Market share gains: Despite no significant growth in order inflows, BHEL has gained market share in private sector orders in FY10. However, if project awarding is higher than expectations in FY11E and FY12E (under the 12th plan), and the company continues to maintain or gain market share, order inflows could grow better than our expectations. .


24


Profit and Loss statement Balance sheet Y/E March (Rs mn) FY10E FY11E FY12E FY13E

Revenues 335,728 404,834 504,512 577,805

Growth (%) 25.6 20.6 24.6 14.5

EBITDA 62,583 76,968 98,054 111,642

Growth (%) 48.3 23.0 27.4 13.9

Depreciation & amortisation 4,580 5,161 5,895 6,335

EBIT 58,003 71,807 92,159 105,307

Growth (%) 49.3 23.8 28.3 14.3

Interest 335 495 495 495

Other income 8,239 9,289 10,119 12,823

EBT 65,907 80,601 101,783 117,635

Income taxes 22,800 28,210 35,624 41,172





Adjustments - - - -


Growth (%) 37.9 21.5 26.3 15.6


FDEPS (Rs) (adj) 88.1 107.0 135.2 156.2

Growth (%) 37.9 21.5 26.3 15.6

DPS (Rs) 23.3 25.3 29.3 29.3

Y/E March (Rs mn) FY10E FY11E FY12E FY13E

Cash and cash eq 115,110 141,125 182,673 244,754


Inventories 92,678 111,869 138,085 158,145




Net fixed assets 39,456 49,295 53,401 52,066

CWIP - - - -

Intangible assets

Deferred tax assets, net 18,403 18,403 18,403 18,403

Other assets - - - -

Total assets 505,090 613,727 757,551 891,265


Other current liabilities

Provisions 74,841 103,674 140,643 179,849

Debt funds 1,274 1,274 1,274 1,274

Other liabilities - - - -

Equity capital 4,895 4,895 4,895 4,895




BVPS (Rs) 325.7 403.1 504.0 630.9

Cash flow statement Financial ratios Y/E March (Rs mn) FY10E FY11E FY12E FY13E


Non-cash adjustments - - - -

Changes in working capital (4,400) (2,047) (3,724) (1,374)

Cash flow from operations 43,287 55,504 68,329 81,424

Capital expenditure (17,763) (15,000) (10,000) (5,000)

Change in investments (275) - - -


Cash flow from investing (18,038) (15,000) (10,000) (5,000)



Dividends paid (13,344) (14,490) (16,781) (14,343)

Other financing cash flow 278 (0) 0 0

Change in cash & cash eq 11,963 26,015 41,549 62,081


Economic Value Added (EVA) analysis Y/E March FY10E FY11E FY12E FY13E

WACC (%) 12.7 12.7 12.7 12.7

ROIC (%) 39.8 40.0 41.3 37.7


EVA (Rs mn) 4,351,767 5,414,898 7,084,270 7,763,026

EVA spread (%) 27.08 27.26 28.57 25.03

Y/E March FY10E FY11E FY12E FY13E


EBITDA margin 18.6 19.0 19.4 19.3

EBIT margin 17.3 17.7 18.3 18.2


ROE 29.9 29.4 29.8 27.5

ROCE 40.0 40.1 41.4 37.8




Payables (days) 476 436 402 393

Current ratio (x) 1.3 1.3 1.3 1.4

Quick ratio (x) 0.7 0.7 0.7 0.7





Adjusted debt/equity 0.0 0.0 0.0 0.0


EV/Sales 3.2 2.6 2.1 1.8

EV/EBITDA 17.0 13.8 10.9 9.5

P/E 27.1 22.3 17.6 15.3

P/BV 7.3 5.9 4.7 3.8


25

Quarterly trend

Particulars Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10

Revenue (Rs mn) 111,344 57,756 69,989 73,860 144,819

YoY growth (%) 34.4 22.8 20.7 14.5 30.1

QoQ growth (%) 72.5 (48.1) 21.2 5.5 96.1

EBITDA (Rs mn) 19,054 4,959 11,385 14,579 27,081

EBITDA margin (%) 17.1 8.6 16.3 19.7 18.7

Adj net income (Rs mn) 13,475 4,706 8,579 10,726 19,096

YoY growth (%) 8.4 22.4 39.3 35.7 41.7

QoQ growth (%) 70.4 (65.1) 82.3 25.0 78.0

DuPont analysis

(%) FY09 FY10E FY11E FY12E FY13E






Return on equity 26.4 29.9 29.4 29.8 27.5

Company profile

BHEL is the leading BTG equipment manufacturer and contractor in

India. The company currently has a capacity of 10 MW, which is

expected to increase to 20 MW at the end of March 2012.


(%) Sep-09 Dec-09 Mar-10

Promoters 67.7 67.7 67.7

FIIs 16.1 15.5 15.2

Banks & FIs 14.2 15.0 15.2

Public 2.0 1.8 1.9



21-Jun-10 Initiating Coverage 2,383 2,400 Hold

Stock performance

1,9002,0002,1002,2002,3002,4002,5002,600

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● Hold

BGR Energy Systems Ltd Initiating Coverage 21 June 2010

26



EBITDA margin 11.3 11.3 11.3 11.3

EBIT margin 11.0 10.9 11.0 11.0


ROE 30.8 30.5 28.7 25.7

ROIC 22.1 20.9 19.7 19.4

ROCE 22.0 20.9 19.7 19.3



Revenue 30,779 41,413 51,055 58,334

Growth (%) 59.5 34.5 23.3 14.3

Adj net income 2,015 2,643 3,259 3,764

Growth (%) 74.3 31.2 23.3 15.5

FDEPS (Rs) 28.0 36.7 45.3 52.3

Growth (%) 74.3 31.2 23.3 15.5

BGR Energy Systems Ltd Future capital requirements a drag – Hold

BGR Energy Systems (BGR) is likely to record high growth in FY11E, driven by the execution profile of its order backlog. However, we expect the company to raise capital in FY11E to support its high growth and as the process to set up BTG capacities is initiated. Hence, we believe that the current valuations need to be discounted for the same. At our current estimates, the stock is trading at a P/E of 20.1x and 16.3x for FY11E and FY12E respectively. Given the limited upside potential from current levels, we initiate coverage on the stock with a Hold recommendation.

Sound execution, robust order inflows provide strong revenue visibility: BGR’s FY09 order intake jumped 3.5x on two large EPC jobs together worth Rs 80bn (Kalisindh and Mettur). However, the order inflow was more subdued in FY10, as the company concentrated on execution. Even after a decline in order accretion in FY10, the company’s order backlog is likely to provide revenue visibility for around three years, second only to Bharat Heavy Electricals (BHEL) in the capital goods sector. Further, BGR expects strong order inflows (~Rs 100bn–Rs 150bn) in FY11E, which in our view will further add to the revenues visibility.

Superior management expertise – moving from BOP to end-to-end EPC: Besides engineering and technology skill sets, EPC and BOP contracts tend to be project management intensive. In our view, BGR enjoys significant advantage over other contractors due to its capability to execute ~18-20 packages across BoP and BTG segments captively.

Diversification into supercritical boilers, turbines and generators: In April ’10, BGR, through its subsidiaries, entered into a technical collaboration with Hitachi to manufacture supercritical boilers, turbines and generators. We believe this diversification is a positive for the company, as it is likely to reduce its working capital requirements once the boilers and turbines are manufactured in-house.

Positives priced in; Hold: In our opinion, BGR’s capital intensive model, which has high working capital requirements, will necessitate capital raising in FY11E to support the company’s high growth. The same hypothesis also gains weight if we build in the incremental capital required for setting up BTG capacity under the prospective JV with Hitachi. Hence, we believe that current valuations need to be discounted for the same. At our current estimates, the stock is trading at a P/E of 20.1x and 16.3x for FY11E and FY12E respectively. Given the limited upside potential from current levels, we initiate coverage on the stock with a Hold recommendation.


Rs 737 Rs 700 HOLD HIGH

BSE NSE BLOOMBERG

532930 BGRENERGY BGRL IN

Company data



Free float (%) 33.0




Stock performance


BGR Energy 737 21.5 43.8 48.6

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

26.320.1

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Valuation matrix


P/E @ CMP 26.3 20.1 16.3 14.1

P/E @ Target 25.0 19.1 15.5 13.4

EV/EBITDA @ CMP 15.5 11.5 9.4 8.2

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 41,413 42,296 51,055 55,109

EPS (Rs) 36.7 36.5 45.3 47.8


27

Fig 39 - BGR P/E band chart

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BGR’s order backlog has a significant concentration of two large orders. We believe such high concentration significantly increases the risk profile of any power contracting business.


29



Revenues 30,779 41,413 51,055 58,334

Growth (%) 59.5 34.5 23.3 14.3

EBITDA 3,487 4,674 5,762 6,583

Growth (%) 66.9 34.0 23.3 14.3


EBIT 3,384 4,529 5,597 6,411

Growth (%) 68.0 33.8 23.6 14.5

Interest 538 647 847 922

Other income 205 89 148 168

EBT 3,051 3,972 4,898 5,658

Income taxes 1,037 1,329 1,639 1,894





Adjustments - - - -


Growth (%) 74.3 31.2 23.3 15.5


FDEPS (Rs) (adj) 28.0 36.7 45.3 52.3

Growth (%) 74.3 31.2 23.3 15.5

DPS (Rs) 3.0 3.0 3.0 3.0


Cash and cash eq 1,102 2,232 3,184 2,993


Inventories 222 292 357 498


Investments 5 5 5 5


Net fixed assets 1,649 2,014 1,959 1,905

CWIP - - - -

Intangible assets 6 6 6 6

Deferred tax assets, net (747) (747) (747) (747)

Other assets

Total assets 28,691 39,246 48,484 54,595



Provisions 1,186 1,588 1,958 2,229

Debt funds 10,499 15,499 18,499 18,499

Other liabilities 44 65 90 116





BVPS (Rs) 103.6 137.0 178.9 227.6



Non-cash adjustments (1) - - -


Cash flow from operations (7,563) (3,137) (1,723) 153

Capital expenditure (721) (510) (110) (117)

Change in investments - - - -


Cash flow from investing (721) (510) (110) (117)


Issue/repay debt 3,409 5,000 3,000 -

Dividends paid (216) (216) (216) (216)

Other financing cash flow 41 (6) (0) (11)

Change in cash & cash eq (5,050) 1,131 952 (191)



WACC (%) 10.8 10.8 10.8 10.8

ROIC (%) 22.1 20.9 19.7 19.4


EVA (Rs mn) 201,447 255,409 278,996 296,990

EVA spread (%) 11.22 10.07 8.89 8.51



EBITDA margin 11.3 11.3 11.3 11.3

EBIT margin 11.0 10.9 11.0 11.0


ROE 30.8 30.5 28.7 25.7

ROCE 22.0 20.9 19.7 19.3




Payables (days) 162 118 121 125

Current ratio (x) 2.6 2.7 2.8 2.7

Quick ratio (x) 2.5 2.6 2.6 2.5







EV/Sales 1.8 1.3 1.1 0.9

EV/EBITDA 15.5 11.5 9.4 8.2

P/E 26.3 20.1 16.3 14.1

P/BV 7.1 5.4 4.1 3.2


30

Quarterly trend


Revenue (Rs mn) 7,183 3,111 4,660 6,351 16,598

YoY growth (%) 24.1 1.4 9.6 33.3 131.1

QoQ growth (%) 50.7 (56.7) 49.8 36.3 161.3

EBITDA (Rs mn) 813 402 551 690 1,721

EBITDA margin (%) 11.3 12.9 11.8 10.9 10.4

Adj net income (Rs mn) 470 202 306 419 1,083

YoY growth (%) 47.2 17.4 29.0 55.2 130.6

QoQ growth (%) 74.0 (56.9) 51.0 37.1 158.5

DuPont analysis







Return on equity 22.3 30.8 30.5 28.7 25.7

Company profile

BGR was incorporated in 1985 as a joint venture between GEA

Energietechnik (Germany) and the promoter of the company, Mr.

B.G. Raghupathy. In 1993, the promoter and promoter family

bought GEA Energietechnik’s stake and became the sole

shareholders of the company. In 1993, the company expanded its

range of products and services in the power and oil and gas

industries. Currently, it manufactures and supplies equipment and

also does turnkey engineering project contracting. In the turnkey

engineering project contracting business, the company executes

projects in the power and oil & gas sectors, wherein it takes turnkey

responsibility to supply a range of equipment and services,

including civil and other works for a project.


(%) Sep-09 Dec-09 Mar-10

Promoters 81.3 81.3 81.3

FIIs 1.9 1.6 1.8

Banks & FIs 7.0 8.1 8.1

Public 9.8 9.0 8.7




Stock performance

200300400500600700800

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● Hold

Crompton Greaves Ltd Initiating Coverage 21 June 2010

31



EBITDA margin 14.0 13.3 13.0 12.8

EBIT margin 12.3 11.9 11.7 11.5


ROE 39.2 31.8 28.7 25.8

ROIC 38.7 33.5 31.4 29.0

ROCE 38.5 33.4 31.3 28.9



Revenue 91,409 99,216 109,914 119,119

Growth (%) 4.6 8.5 10.8 8.4

Adj net income 8,247 8,358 9,105 9,760

Growth (%) 47.3 1.4 8.9 7.2

FDEPS (Rs) 12.9 13.0 14.2 15.2

Growth (%) 47.3 1.4 8.9 7.2

Crompton Greaves Ltd Subsidiary portfolio to drag consolidated earnings-Hold

Crompton Greaves (CRG) is an emerging leader in the power transmission space in our view. Further the company has gained market share in domestic transmission orders in FY10, in our view. However we believe de-growth in subsidiary (in INR terms) is likely to result in lower growth in FY11E and FY12E for the company. At current estimates the stock trades at a P/E multiple of 20x and 18.3x for FY11E and FY12E respectively. We initiate coverage on the stock with a HOLD rating, with a target price of INR 285.

Enhanced product profile in the power products segment: CRG has outperformed its peers on most counts in FY10, mainly due to the consolidation of a string of acquisitions that began in FY07. Thus, the company’s enhanced product profile in the power products segment has improved its market share through FY09 and FY10. If we track the transformer orders awarded by PGCIL in FY10, we note that CRG, along with Ganz, has the highest share of these orders at 22.8%.

Power product margins significantly ahead of peers: CRG’s margins in the power products segment have been way ahead of peers at the parent level. We believe that margin expansion for CRG is likely to be a function of global sourcing and local manufacturing; we believe that the management may have exploited both these levers optimally in FY10. The management has guided to maintaining the company’s margins at the consolidated level, which we believe is commendable given that pressures exist in both, the domestic and international markets.

Exports bottom out, to grow in excess of 20% in FY11E: We believe that CRG’s subsidiary portfolio is likely to see modest growth in FY11E and FY12E due to pressure on the distribution transformers-based business. However, due to expected YoY depreciation of the euro versus the rupee, CRG is likely to see a decline at the subsidiary level after translation.

Subdued margin, revenue growth ahead; Hold: While we believe that CRG is emerging as a leader in India’s power transmission and distribution equipment market, we expect no positive surprises on the margin front in FY11E and FY12E. Due to sedate performance of the subsidiary business, we expect consolidated revenues to grow modestly in FY11E and FY12E. Currently, the stock is trading at P/E of 20x and 18.3x and an EVEG (one of the highest in the sector) of 2.2x and 2x for FY11E and FY12E respectively. We initiate coverage on the stock with a Hold recommendation and a target price of Rs 285.



BSE NSE BLOOMBERG

500093 CROMPGREAV CRG IN

Company data



Free float (%) 350.8



2-month average daily volume 1,697,692

Stock performance


TEE 260 5.4 4.1 8.5

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

20.2 20 18.323.1

17.7 15.0

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Crompton Greaves Industry(x)

Valuation matrix


P/E @ CMP 20.2 20.0 18.3 17.1

P/E @ Target 22.1 21.9 20.1 18.8

EV/EBITDA @ CMP 13.2 12.8 11.8 11.0

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 99,216 99,880 109,914 113,312

EPS (Rs) 13.0 14.0 14.2 16.2


32

Fig 45 - Crompton Greaves P/E band chart

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Fig 49 - Working capital as % of Sales

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02468

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Key risks

Above-expected margin growth: If CRG’s margins continue to tread upwards, it is likely that the company will outperform our estimates. The company’s margins have been exceptionally strong over the last six to eight quarters.

Sooner-than-expected recovery in European markets: This is likely to impact the company in two ways. Firstly, the growth in euro terms is likely to be ahead of expectations. Secondly, it is likely to strengthen the euro versus the rupee and thus translate into higher-than-estimated growth in rupee terms.


34



Revenues 91,409 99,216 109,914 119,119

Growth (%) 4.6 8.5 10.8 8.4

EBITDA 12,770 13,182 14,308 15,279

Growth (%) 28.3 3.2 8.5 6.8


EBIT 11,219 11,793 12,834 13,718

Growth (%) 28.4 5.1 8.8 6.9

Interest 265 632 654 675

Other income 937 1,196 1,297 1,404

EBT 11,891 12,357 13,477 14,447

Income taxes 3,650 4,024 4,394 4,709


Extraordinary items (352) - - -

Min into / inc from associates (6) (25) (22) (22)


Adjustments 352 - - -


Growth (%) 47.3 1.4 8.9 7.2


FDEPS (Rs) (adj) 12.9 13.0 14.2 15.2

Growth (%) 47.3 1.4 8.9 7.2

DPS (Rs) 4.4 5.2 5.2 5.2


Cash and cash eq 6,888 8,050 10,612 13,385


Inventories 13,550 15,488 17,561 19,683


Investments 2,870 2,905 2,933 2,452


Net fixed assets 11,894 12,056 12,132 12,121

CWIP - - - -

Intangible assets

Deferred tax assets, net 786 1,001 1,185 1,348

Other assets - - 4 4

Total assets 70,554 80,921 92,629 104,772



Provisions 6,330 6,556 6,971 7,284

Debt funds 8,716 8,990 9,275 9,539


Equity capital 1,283 1,283 1,283 1,283




BVPS (Rs) 37.1 45.0 54.0 64.0



Non-cash adjustments 303 214 184 163



Capital expenditure 340 (1,550) (1,550) (1,550)

Change in investments (1,198) (35) (28) 481

Other investing cash flow (708) (0) (4) (0)

Cash flow from investing (1,565) (1,585) (1,582) (1,069)

Issue of equity 550 - - -

Issue/repay debt 1,534 274 285 264

Dividends paid (3,310) (3,310) (3,310) (3,310)

Other financing cash flow 30 22 19 19




WACC (%) 12.6 12.6 12.6 12.6

ROIC (%) 38.7 33.5 31.4 29.0


EVA (Rs mn) 848,941 792,989 826,884 832,889

EVA spread (%) 26.11 20.96 18.83 16.45



EBITDA margin 14.0 13.3 13.0 12.8

EBIT margin 12.3 11.9 11.7 11.5


ROE 39.2 31.8 28.7 25.8

ROCE 38.5 33.4 31.3 28.9




Payables (days) 188 200 207 216

Current ratio (x) 1.5 1.5 1.6 1.6

Quick ratio (x) 0.9 1.0 1.0 1.0







EV/Sales 1.8 1.7 1.5 1.4

EV/EBITDA 13.2 12.8 11.8 11.0

P/E 20.2 20.0 18.3 17.1

P/BV 7.0 5.8 4.8 4.1


35

Quarterly trend


Revenue (Rs mn) 24,600 21,975 21,890 22,464 25,079

YoY growth (%) 20.9 4.7 1.8 (8.7) 14.1

QoQ growth (%) 14.4 (10.7) (0.4) 2.6 11.6

EBITDA (Rs mn) 2,988 2,105 2,679 2,805 3,630

EBITDA margin (%) 12.1 9.6 12.2 12.5 14.5


YoY growth (%) 58.2 33.5 56.8 2.9 68.5

QoQ growth (%) 57.2 (17.3) 20.6 3.2 35.3

DuPont analysis







Return on equity 35.7 39.2 31.8 28.7 25.8

Company profile

CRG is a leading power transmission equipment manufacturer in

India. After successful acquisition in Europe in FY2007 and

FY2008, the company also has presence in the western world. CRG

also manufactures industrial products like motors and drives and

consumer products like fans.


(%) Sep-09 Dec-09 Mar-10

Promoters 40.9 40.9 40.9

FIIs 13.9 15.7 15.7

Banks & FIs 36.2 34.9 34.4

Public 9.0 8.5 8.9




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● Hold

Cummins India Ltd Initiating Coverage 21 June 2010

36



EBITDA margin 18.8 18.8 18.6 18.4

EBIT margin 17.1 17.1 16.9 17.3

Adj PAT margin 14.6 14.3 13.9 13.5

ROE 29.5 28.4 27.6 26.8

ROIC 34.4 34.0 33.6 34.3

ROCE 48.4 45.6 43.2 42.5



Revenue 32,071 35,673 40,980 47,279

Growth (%) (9.1) 11.2 14.9 15.4

Adj net income 4,672 5,092 5,676 6,386

Growth (%) 5.3 9.0 11.5 12.5

FDEPS (Rs) 23.6 25.7 28.7 32.3

Growth (%) 5.3 9.0 11.5 12.5

Cummins India Ltd Stretched valuations limit upside potential; Hold

While revenue growth for Cummins India (KKC) is likely to be robust in FY11E, margin pressures are expected to mute bottomline growth during the year. Though we like KKC’s business model that is characterised by a strong product profile, we believe that the current valuations leave limited room for upsides. Currently, the stock is trading at a P/E of 23.6x and 21.2x its F11E and FY12E earnings respectively. We initiate coverage on KKC with a Hold rating and a target price of Rs 575.

Mining related growth to drive demand for mobile power: Demand for mobile power is primarily driven by demand for industrial and construction machinery that is used in mining activities. We believe that the demand in mining related areas is set to grow in the backdrop of the government’s renewed thrust on infrastructure development. This, in turn, would increase demand for construction and industrial machinery and benefit established players like KKC.

Margins headed southwards: In FY10, KKC reported an EBITDA margin of 20.1% (up by 550bps YoY) at the standalone level. Excluding Cummins Sales and Service (CSS), the EBIT margin stood at 18.2% (up 290bps YoY). According to the management, commodity prices have already inched up, thus ruling out the chances of this lever playing out in favour of the company in FY11E. We concur with the management’s view and believe that though KKC had surprised positively on the margin front in FY09 and FY10, the probability of the same happening in FY11E is lower.

Exports bottom out; set to grow in FY11E: KKC is the global source for V28, K38, and K50 engines used for genset applications; the company also has exclusive manufacturing rights for V38 and K38 engines. Moreover, KKC is a net exporter of such machines to the Cummins group. KKC, however, reported a staggering 66.3% YoY decline in its exports to Rs 4.3bn in FY10. In our opinion, the company’s exports may have bottomed out in Q2FY10, at a level of Rs 723mn. We believe that while exports are unlikely to touch the previous highs of FY09 (Rs 12.8bn), the probability of a ~20% export growth is high.

Limited upside potential; initiate with Hold: Even as we like KKC’s business model (characterised by a strong product profile that leads to superior return ratios), we believe that the current valuations offer limited upside potential. At our current estimates, the stock trades at a P/E of 23.6x and 21.2x its FY11E and FY12E earnings. Historically, the stock has traded in a PE band of 12x-18x, one-year forward. We assign a target price of Rs 575 to the stock, implying a target PE of 20x. We initiate coverage on KKC with a Hold recommendation.



BSE NSE BLOOMBERG

500480 CUMMINSIND KKC IN

Company data

Market cap (Rs mn / US$ mn) 120,146 /2,594


Free float (%) 41.0




Stock performance


Cummins India 607 7.7 27.7 48.4

BSECG 14,462 6.4 3.3 5.0

Sensex 17,338 2.0 1.0 1.4

P/E comparison

25.7 23.6 21.223.117.7 15.0

0

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20

30

FY10E FY11E FY12E

Cummins India Industry(x)

Valuation matrix


P/E @ CMP 25.7 23.6 21.2 18.8

P/E @ Target 24.4 22.4 20.1 17.8

EV/EBITDA @ CMP 19.9 17.9 15.7 13.8

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 35,673 37,375 40,980 44,434

EPS (Rs) 25. 27.3 28.7 32.7


37

Fig 50 - Cummins P/E band chart

0100200300400500600700800900

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Fig 52 - RoCE

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Key risks

Above-expected hike in policy rates: High inflation may prod the RBI to hike key policy rates. We believe that if policy rates increase beyond a threshold, capacity expansion across the industry could be lower-than-expectations. This could impact our FY11 and FY12 revenue and earnings estimates for KKC.


39



Revenues 32,071 35,673 40,980 47,279

Growth (%) (9.1) 11.2 14.9 15.4

EBITDA 6,021 6,701 7,625 8,712

Growth (%) 13.6 11.3 13.8 14.3


EBIT 5,493 6,116 6,922 8,177

Growth (%) 14.1 11.3 13.2 18.1

Interest 18 13 13 17

Other income 1,040 997 999 728

EBT 6,515 7,100 7,908 8,889

Income taxes 2,023 2,204 2,450 2,749





Adjustments - - - -


Growth (%) 5.3 9.0 11.5 12.5


FDEPS (Rs) (adj) 23.6 25.7 28.7 32.3

Growth (%) 5.3 9.0 11.5 12.5

DPS (Rs) 12.0 12.0 12.0 12.0


Cash and cash eq 764 1,570 2,335 4,256


Inventories 4,292 4,785 5,529 6,417


Investments 4,417 4,417 4,417 4,417


Net fixed assets 3,791 4,106 4,303 4,669

CWIP

Intangible assets


Other assets (32) (32) (32) (32)

Total assets 25,195 27,987 31,338 36,387



Provisions 2,792 2,657 2,193 2,545

Debt funds 87 87 87 87






BVPS (Rs) 84.6 96.2 110.9 129.1



Non-cash adjustments 68 - - -

Changes in working capital (897) (1,192) (1,934) (1,319)


Capital expenditure (1,167) (900) (900) (900)



Cash flow from investing (1,167) (900) (900) (900)

Issue of equity (1) - - -


Dividends paid (1,782) (2,376) (2,376) -

Other financing cash flow (998) (404) (404) (2,780)

Change in cash & cash eq 250 806 765 1,921

Closing cash & cash eq 764 1,570 2,335 4,256


WACC (%) 11.3 11.3 11.3 11.3

ROIC (%) 34.4 34.0 33.6 34.3


EVA (Rs mn) 388,186 434,122 491,327 589,140

EVA spread (%) 23.06 22.68 22.29 22.97



EBITDA margin 18.8 18.8 18.6 18.4

EBIT margin 17.1 17.1 16.9 17.3


ROE 29.5 28.4 27.6 26.8

ROCE 48.4 45.6 43.2 42.5




Payables (days) 98 98 97 97

Current ratio (x) 2.0 2.2 2.4 2.5

Quick ratio (x) 1.4 1.5 1.6 1.5







EV/Sales 3.7 3.4 2.9 2.5

EV/EBITDA 19.9 17.9 15.7 13.8

P/E 25.7 23.6 21.2 18.8

P/BV 7.2 6.3 5.5 4.7


40

Quarterly trend


Revenue (Rs mn) 10,714 6,256 6,191 8,279 7,883

YoY growth (%) - (11.5) (23.4) 7.4 (26.4)

QoQ growth (%) 39.0 (41.6) (1.1) 33.7 (4.8)

EBITDA (Rs mn) 1,674 948 1,036 1,822 1,512

EBITDA margin (%) 15.6 15.2 16.7 22.0 19.2

Adj net income (Rs mn) 1,182 897 877 1,481 1,183

YoY growth (%) - 1.7 (6.6) 29.8 0.1

QoQ growth (%) 3.5 (24.1) (2.2) 68.9 (20.1)

DuPont analysis







Return on equity 32.5 29.5 28.4 27.6 26.8

Company profile

KKC is a subsidiary of Cummins, US, which holds 51% stake in the

company. It is a leading manufacturer of medium-high HP range of

diesel engines in India with manufacturing facilities in Pune and

Daman.


(%) Sep-09 Dec-09 Mar-10

Promoters 51.0 51.0 51.0

FIIs 10.0 10.7 10.8

Banks & FIs 28.8 28.4 28.3

Public 10.2 10.0 9.9




Stock performance

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● Hold

Jyoti Structures Ltd Initiating Coverage 21 June 2010

41



EBITDA margin 11.9 11.5 11.5 11.2

EBIT margin 11.0 10.7 10.8 10.5


ROE 20.1 19.6 19.0 18.5

ROIC 28.0 27.6 28.1 27.8

ROCE 28.3 27.6 28.1 27.8



Revenue 20,185 23,889 27,295 31,333

Growth (%) 17.6 18.3 14.3 14.8

Adj net income 919 1,071 1,243 1,437

Growth (%) 15.3 16.5 16.1 15.6

FDEPS (Rs) 11.2 13.1 15.2 17.6

Growth (%) 15.1 16.5 16.1 15.6

Jyoti Structures Ltd Steady performer

Jyoti Structures (JYS) is our preferred pick in the domestic power transmission EPC segment. We like the company as we believe it has a higher concentration of revenues from domestic utilities and its market share in orders awarded by the key transmission utility, PGCIL, has been higher than its listed peers. Currently, the stock is trading at a P/E of 11.8x and 10.2x its FY11E and FY12E earnings respectively. We initiate coverage on JYS with a Buy recommendation.

Pure play on power T&D EPC space: Unlike its listed peers, JYS is a pure play on India’s power T&D EPC space. While KEC International (KEC) has significant international presence, Kalpataru Power and Transmission (KPP) has a presence across several business verticals besides power T&D EPC. We believe that JYS can be the preferred choice for investors who seek to play on India’s power T&D story.

Highest market share in the listed transmission tower EPC space: JYS’ market share in PGCIL orders over FY08-FY10, at 12.8%, has been the highest amongst the three listed EPC contractors for power transmission towers: KEC and KPP have trailed with a share of 9.3% and 9.2% in these orders respectively. Importantly, the market share of JYS has remained more stable than peers over this period. While this metric does not capture the dynamics of the entire transmission tower EPC market, we believe that it gives a fair idea about the competitive positioning of each player, as PGCIL continues to be the most preferred customer for all top companies.

Conservative approach: marginal international exposure lowers risk: Post FY07, while most transmission tower EPC companies have faltered in terms of revenues growth and margins, JYS’ EBITDA margin has shrunk by only ~100bps from its peak levels of 12.9% in FY07. Further, since JYS has marginal exposure to international markets, it is cushioned against the risks emanating from fixed price contracts and unfavourable cross currency movements.

Good revenue visibility, significant upside potential – Buy: JYS has a robust order book of Rs 41.5bn (or ~2x its FY10 revenues) which provides good revenue visibility. On our current EPS of Rs 13.1 and Rs 15.2, the stock trades at P/E of 11.8x and 10.2x its FY09E and FY10E earnings, respectively. Historically, the stock has traded in a PE band of 12 and 18. We assign a target FY12E PE of 12x to the stock, implying a target price of Rs 185. We believe that the stock holds significant upside potential from current levels. We initiate coverage on JYS with a Buy recommendation.


Rs154 Rs 185 BUY HIGH

BSE NSE BLOOMBERG

513250 JYOTISTRUC JYS IN

Company data

Market cap (Rs mn / US$ mn) 12,661 /8,123


Free float (%) 69.5




Stock performance


Jyoti Structures 154 6.8 (6.3) 2.2

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

13.7 11.8 10.2

23.117.7 15.0

05

10152025

FY10E FY11E FY12E

Jyoti Structures Industry(x)

Valuation matrix


P/E @ CMP 13.7 11.8 10.2 8.8

P/E @ Target 16.5 14.1 12.2 10.5

EV/EBITDA @ CMP 6.4 5.6 4.9 4.4

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 23,889 25,257 27,295 29,680

EPS (Rs) 13.1 14.9 15.2 17.3


42

Fig 55 - Jyoti Structures P/E band chart

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Fig 60 - Working Capital as a % of Sales

272829303132333435363738




Key risks

Higher proportion of substation orders: We believe that substation orders entail higher working capital than EPC orders for transmission towers. While the proportion of substation orders has remained constant in JYS’ order backlog over the past few years, any increase in this proportion has the potential to impact cash flows negatively.

Risk of dilution: We expect the company to generate negative cash flows at the operating level over the next few years, due to a) the high growth phase that company is currently in b) the high working capital requirement of its business model. Negative operating level cash flows are likely to increase the risk of equity dilution for the company.


44



Revenues 20,185 23,889 27,295 31,333

Growth (%) 17.6 18.3 14.3 14.8

EBITDA 2,398 2,736 3,136 3,507

Growth (%) 22.4 14.1 14.6 11.9


EBIT 2,229 2,557 2,938 3,288

Growth (%) 19.0 14.7 14.9 11.9

Interest 786 912 1,028 1,080

Other income 1 2 2 3

EBT 1,444 1,647 1,912 2,211

Income taxes 524 576 669 774




Reported net income 919 1,071 1,243 1,437

Adjustments - - - -

Adjusted net income 919 1,071 1,243 1,437

Growth (%) 15.3 16.5 16.1 15.6


FDEPS (Rs) (adj) 11.2 13.1 15.2 17.6

Growth (%) 15.1 16.5 16.1 15.6

DPS (Rs) 1.0 1.0 1.0 1.0


Cash and cash eq 189 184 254 320


Inventories 1,635 2,032 2,321 2,676




Net fixed assets 1,639 1,703 1,782 1,880

CWIP 52 52 52 52

Intangible assets


Other assets 12 12 12 12

Total assets 13,846 16,194 18,373 20,955



Provisions 289 359 410 473

Debt funds 3,736 3,864 3,992 4,120

Other liabilities





BVPS (Rs) 61.0 72.9 87.0 103.4





Cash flow from operations (212) 205 315 352


Change in investments 141 - - -




Issue/repay debt 700 128 128 128

Dividends paid (96) (96) (96) (96)

Other financing cash flow (0) - - -

Change in cash & cash eq (82) (5) 71 66

Closing cash & cash eq 189 184 254 320


WACC (%) 10.1 10.1 10.1 10.1

ROIC (%) 28.0 27.6 28.1 27.8


EVA (Rs mn) 155,888 171,409 199,278 221,912

EVA spread (%) 17.86 17.44 17.94 17.65



EBITDA margin 11.9 11.5 11.5 11.2

EBIT margin 11.0 10.7 10.8 10.5


ROE 20.1 19.6 19.0 18.5

ROCE 28.3 27.6 28.1 27.8




Payables (days) 144 129 134 133

Current ratio (x) 2.4 2.3 2.3 2.3

Quick ratio (x) 2.1 1.9 2.0 1.9







EV/Sales 0.8 0.6 0.6 0.5

EV/EBITDA 6.4 5.6 4.9 4.4

P/E 13.7 11.8 10.2 8.8

P/BV 2.5 2.1 1.8 1.5


45

Quarterly trend


Revenue (Rs mn) 4,736 4,858 4,730 5,121 5,477

YoY growth (%) 17.9 15.4 9.2 8.1 12.7

QoQ growth (%) 9.4 2.6 (2.6) 8.3 6.9

EBITDA (Rs mn) 498 509 505 552 655

EBITDA margin (%) 10.5 10.5 10.7 10.8 12.0

Adj net income (Rs mn) 210 224 209 234 253

YoY growth (%) 2.3 11.2 15.6 11.1 13.0

QoQ growth (%) 16.3 6.5 (6.7) 11.9 8.2

DuPont analysis







Return on equity 21.1 20.1 19.6 19.0 18.5

Company profile

JYS is a leading power transmission tower EPC company in India.

The company provides EPC and contracting services across the

power transmission and distribution value chain. Transmission

tower EPC contributes about ~60% to the order backlog. The

remainder is equally distributed between sub-station and

distribution contracting.


(%) Sep-09 Dec-09 Mar-10

Promoters 26.9 26.8 26.8

FIIs 17.5 16.2 14.1

Banks & FIs 37.8 37.7 40.6

Public 17.9 19.3 18.5



21-Jun-10 Initiating Coverage 154 185 Buy

Stock performance

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● Buy

Kalpataru Power Transmission Ltd Initiating Coverage 21 June 2010

46



EBITDA margin 11.7 11.7 11.7 11.7

EBIT margin 10.3 10.2 10.3 10.4


ROE 18.7 18.7 18.0 17.7

ROIC 16.6 17.5 17.7 17.9

ROCE 17.9 18.7 18.8 18.8



Revenue 25,974 31,193 35,299 39,863

Growth (%) 38.0 20.1 13.2 12.9

Adj net income 1,705 2,005 2,276 2,623

Growth (%) 80.6 17.6 13.5 15.2

FDEPS (Rs) 64.3 65.3 74.2 85.5

Growth (%) 80.6 1.6 13.5 15.2

Kalpataru Power Transmission Ltd Dilution to mute earnings growth; Hold

Kalpataru Power Transmission (KPP) is one of India’s leading contractors in the power transmission tower EPC space with interests in the pipeline infrastructure contracting and logistics space. We believe that even as the profitability of the company has improved in Q4FY10, flat order backlog and dilution pose as potential risks to earnings growth. We initiate coverage on the stock with a Hold recommendation and a target price of Rs 1000.

Changing business mix to lower risk profile: KPP is an active player in the power T&D EPC, pipeline EPC, and logistics segments; it now intends to enter the private BOT transmission projects space. We believe that over the long term, KPP would graduate from a pure EPC play to an EPC contractor plus asset developer. The change in the business mix is likely to lower the company’s risk profile arising from concentration on a pure EPC business.

Order backlog flat with high concentration of fixed-price international orders: During Q4FY10, KPP’s revenues grew by a sharp 50.1% and EBITDA by 60% YoY. However, in our opinion, overemphasis on a strong headline number can conceal the company’s flat YoY growth in its order backlog – this may lead to lower growth in FY11E and FY12E. Further, the order backlog at Rs 50bn includes 30% international orders that are likely to be fixed contracts. This enhances the risk on negative margin surprises if commodity prices move up in FY11E.

Dilution to negate profit growth at the EPS level: KPP raised Rs 4.4bn through a QIP at Rs 1074.2/ share, implying a dilution of 15.8%. The proceeds from the QIP are to be utilised for capacity expansion in tower manufacturing and investments in BOOT projects. We believe that even as revenues are likely to grow ~20% in FY11E, the same are unlikely to translate into significant EPS growth due to equity dilution.

No positive triggers; Hold: Competition in the power transmission tower EPC business has increased over the last few years. Even as the pie of orders has grown, heightened competition is likely to pressurise margins. After excluding the impact for the shareholding in JMC Projects, the stock is trading at a P/E of 15.2x and 13.4x for FY11E and FY12E respectively. While execution and order inflows have picked up for the company and are likely to remain strong over FY11E, in absence of any major triggers, the stock is likely to underperform its peers. At our target price of Rs 1000, we imply a one-year target PE of 13x for the stock. We initiate coverage on the stock with a Hold rating.


Rs 1,033 Rs 1,000 HOLD HIGH

BSE NSE BLOOMBERG

522287 KALPATPOWR KPP IN

Company data

Market cap (Rs mn / US$ mn) 27,363/589


Free float (%) 36.3




Stock performance


KPP 1,033 (2.4) 2.9 0.1

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

16.1 15.8 13.9

23.117.7 15.0

05

10152025

FY10E FY11E FY12E

Kalpataru Power Industry(x)

Valuation matrix


P/E @ CMP 16.1 15.8 13.9 12.1

P/E @ Target 15.5 15.3 13.5 11.7

EV/EBITDA @ CMP 11.0 9.2 8.1 7.2

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 31,193 32,713 35,299 38,495

EPS (Rs) 65.3 82.3 74.2 73.6


47

Fig 61 - Kalpataru Power Transmission P/E band chart

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Fixed price contracts in the international geography: International order constitute 30% of KPP’s order backlog. While a large portion of international contracts are hedged against any hike in the commodity prices, any significant increase in commodity prices would negatively impact margins and thus pose a risk to our estimates.


49



Revenues 25,974 31,193 35,299 39,863

Growth (%) 38.0 20.1 13.2 12.9

EBITDA 3,048 3,639 4,138 4,667

Growth (%) 36.8 19.4 13.7 12.8


EBIT 2,665 3,193 3,640 4,129

Growth (%) 36.4 19.8 14.0 13.4

Interest 723 790 892 949

Other income 333 271 287 317

EBT 2,276 2,674 3,035 3,497

Income taxes 571 668 759 874





Adjustments - - - -


Growth (%) 80.6 17.6 13.5 15.2


FDEPS (Rs) (adj) 64.3 65.3 74.2 85.5

Growth (%) 80.6 1.6 13.5 15.2

DPS (Rs) 7.5 7.5 7.5 7.5


Cash and cash eq 220 895 1,147 1,886


Inventories 3,707 4,452 5,038 5,689


Investments 1,268 1,268 1,268 1,268


Net fixed assets 3,502 3,556 3,557 3,520

CWIP - - - -

Intangible assets



Total assets 27,873 31,093 34,700 39,134



Provisions 1,313 1,585 1,793 2,025

Debt funds 7,297 7,697 8,097 8,497

Other liabilities





BVPS (Rs) 371.4 378.6 444.0 520.6





Cash flow from operations 458 1,001 622 1,109





Issue of equity - 42 - -


Dividends paid (233) (233) (269) (269)

Other financing cash flow 0 (37) (0) (0)

Change in cash & cash eq (225) 674 252 739

Closing cash & cash eq 220 895 1,147 1,886


WACC (%) 9.4 9.4 9.4 9.4

ROIC (%) 16.6 17.5 17.7 17.9


EVA (Rs mn) 123,166 155,999 180,208 206,412

EVA spread (%) 7.19 8.08 8.30 8.43



EBITDA margin 11.7 11.7 11.7 11.7

EBIT margin 10.3 10.2 10.3 10.4


ROE 18.7 18.7 18.0 17.7

ROCE 17.9 18.7 18.8 18.8




Payables (days) 263 227 218 216

Current ratio (x) 2.2 2.2 2.3 2.4

Quick ratio (x) 1.8 1.8 1.8 1.8







EV/Sales 1.3 1.1 0.9 0.8

EV/EBITDA 11.0 9.2 8.1 7.2

P/E 16.1 15.8 13.9 12.1

P/BV 2.8 2.7 2.3 2.0


50

Quarterly trend


Revenue (Rs mn) 5,584 4,873 5,525 7,192 8,383

YoY growth (%) (11.3) 2.6 27.7 72.0 50.1

QoQ growth (%) 33.6 (12.7) 13.4 30.2 16.6

EBITDA (Rs mn) 503 502 630 715 818

EBITDA margin (%) 9.0 10.3 11.4 9.9 9.8


YoY growth (%) (54.0) 10.6 65.5 120.9 147.7

QoQ growth (%) 16.1 38.4 15.1 19.4 30.2

DuPont analysis







Return on equity 11.8 18.7 18.7 18.0 17.7

Company profile

Kalpataru Power Transmission (KPP), located at Gandhinagar,

Gujarat, was promoted by Mr. Mofatraj Munot, Mr. Mahendra

Punatar, and Mr. Imtiaz Kanga. The company has three business

divisions viz. transmission line division, biomass energy division,

and pipelines division. Transmission line business contributed

~84% to sales while the pipelines business contributed ~14% to

sales in FY10 at the parent level. KPP also has a ~51% stake in JMC

Projects.


(%) Sep-09 Dec-09 Mar-10

Promoters 63.7 63.7 63.7

FIIs 7.5 5.5 5.1

Banks & FIs 23.8 24.4 24.0

Public 5.0 6.4 7.2



21-Jun-10 Initiating Coverage 1,033 1,000 Hold

Stock performance

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KEC International Ltd Initiating Coverage 21 June 2010

51



EBITDA margin 10.4 10.2 10.2 10.2

EBIT margin 9.7 9.5 9.6 9.6


ROE 29.4 26.7 24.9 24.4

ROIC 28.5 27.6 28.0 28.9

ROCE 28.4 27.9 28.3 29.2



Revenue 39,082 45,594 52,294 63,196

Growth (%) 14.0 16.7 14.7 20.8

Adj net income 1,897 2,215 2,590 3,182

Growth (%) 62.4 16.8 16.9 22.8

FDEPS (Rs) 36.9 43.1 50.4 61.9

Growth (%) 55.8 16.8 16.9 22.8

KEC International Ltd Heightened competition reins in valuation upside; Hold

KEC International (KECI) is amongst the world’s leading power transmission tower EPC companies, with strong project management capabilities. However, even as order inflows are expected to increase in FY11E across the power transmission spectrum, we believe that competition has intensified considerably in the domestic transmission tower sector. We thus believe that sector/company valuations are unlikely to touch earlier highs. At our current estimates, the stock is trading at a P/E of 11x and 9.4x its FY11E and FY12E earnings respectively. We initiate coverage on KECI with a Hold and a target price of Rs 500, implying a target PE of 10x FY10.

Global EPC play in the power T&D space: Apart from India, KECI has a significant presence in Africa, Central Asia, and the Middle East. The company has executed orders in ~40 countries and is currently working on ~100 projects concurrently. KECI also has the most diversified client base across the industry, both domestically and globally. These metrics clearly point out to the vastness of company’s scale of operations.

Strong project management capabilities: KECI has executed projects in diverse terrains such as Kazakhstan, Saudi Arabia, Iraq, and Afghanistan. While operating in such high-risk zones has heightened its business risk profile, the company, in the process, has acquired the necessary skill sets to manage and execute projects in such difficult geographies. The company has a fleet of 69 stringing equipment, higher than its peers which add capacity for project management.

Diversifying into EPC for railways: In the 11th plan, Indian Railways (IR) has earmarked ~Rs 430bn for capacity expansion. KECI brings to the table its strong project management capabilities – the mainstay for securing contracts from IR. Not surprisingly, the company has recently secured a signalling related order worth Rs 1.3bn from IR. Further, KECI also has pre-qualifications from IR as the company was earlier involved in setting up railway infrastructure for IR. We believe that diversification into the railway EPC space would increase KECI’s revenue visibility once the orders from IR pick up in a non-crowed market.

Valuations may not touch previous highs; Hold : KECI’s order backlog has grown at a ~15% CAGR FY08- FY10. However, we expect that growth in order inflows would in sync with the improvement in outlook for order inflows in FY11E and FY12E. At our current estimates, the stock is trading at a P/E multiple of 11.2x and 9.6x for FY11E and FY12E respectively. On a three-year basis, the stock has traded at an average one-year forward PE band of 6x-12x. We believe that valuations are unlikely to touch earlier highs, given the heightened competition in the power transmission tower EPC space. We initiate coverage on KECI with a Hold.


Rs 474 Rs 500 HOLD HIGH

BSE NSE BLOOMBERG

532714 KEC KECI IN

Company data

Market cap (Rs mn / US$ mn) 22959 / 496


Free float (%) 87.3




Stock performance


KEC International 474 (8.3) (15.9) (19.0)

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

12.9 11 9.4

23.117.7 15.0

05

10152025

FY10E FY11E FY12E

KEC International Industry(x)

Valuation matrix


P/E @ CMP 12.9 11.0 9.4 7.7

P/E @ Target 13.6 11.6 9.9 8.1

EV/EBITDA @ CMP 6.8 6.0 5.2 4.3

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 45,594 46,121 52,294 53,159

EPS (Rs) 43.1 42.4 50.4 51.7


52

Fig 67 - KEC International P/E band chart

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Delay in order awarding by PGCIL: KECI’s order backlog has grown by only ~10% YoY in FY10, particularly as order inflows from PGCIL have fallen below-expectations. In case of a delay in the anticipated capacity expansion plans of PGCIL, growth in the company’s order backlog could be below expectations in FY11E, negatively impacting the earnings estimates for FY12E.


54



Revenues 39,082 45,594 52,294 63,196

Growth (%) 14.0 16.7 14.7 20.8

EBITDA 4,069 4,637 5,352 6,426

Growth (%) 35.0 14.0 15.4 20.0


EBIT 3,798 4,338 4,994 6,045

Growth (%) 36.5 14.2 15.1 21.0

Interest 865 1,054 1,155 1,331

Other income - 2 3 6

EBT 2,934 3,286 3,843 4,720

Income taxes 1,037 1,071 1,253 1,539





Adjustments - - - -


Growth (%) 62.4 16.8 16.9 22.8


FDEPS (Rs) (adj) 36.9 43.1 50.4 61.9

Growth (%) 55.8 16.8 16.9 22.8

DPS (Rs) 4.8 4.8 4.8 4.8


Cash and cash eq 623 710 1,631 2,799


Inventories 2,216 2,581 2,958 3,577




Net fixed assets 5,778 5,980 6,121 6,241

CWIP - - - -

Intangible assets


Other assets

Total assets 30,660 35,011 40,205 48,219



Provisions 385 472 541 654

Debt funds 7,518 7,318 7,518 8,218






BVPS (Rs) 142.8 180.2 225.0 281.3



Non-cash adjustments (476) - - -


Cash flow from operations (1,500) 1,076 1,510 1,256






Issue/repay debt 1,300 (200) 200 700

Dividends paid (289) (289) (289) (289)

Other financing cash flow 131 (0) 0 (0)

Change in cash & cash eq (788) 87 921 1,168

Closing cash & cash eq 623 710 1,631 2,799


WACC (%) 9.9 9.9 9.9 9.9

ROIC (%) 28.5 27.6 28.0 28.9


EVA (Rs mn) 276,439 293,592 345,632 432,146

EVA spread (%) 18.60 17.70 18.11 19.05



EBITDA margin 10.4 10.2 10.2 10.2

EBIT margin 9.7 9.5 9.6 9.6


ROE 29.4 26.7 24.9 24.4

ROCE 28.4 27.9 28.3 29.2




Payables (days) 208 178 180 175

Current ratio (x) 1.6 1.6 1.6 1.6

Quick ratio (x) 1.4 1.4 1.5 1.5







EV/Sales 0.7 0.6 0.5 0.4

EV/EBITDA 6.8 6.0 5.2 4.3

P/E 12.9 11.0 9.4 7.7

P/BV 3.3 2.6 2.1 1.7


55

Quarterly trend


Revenue (Rs mn) 11,350 7,266 8,745 9,377 13,451

YoY growth (%) 10 21 8 6 19

QoQ growth (%) 28 (36) 20 7 43

EBITDA (Rs mn) 1,022 797 838 860 1,167

EBITDA margin (%) 9.0 11.0 9.6 9.2 8.7


YoY growth (%) 33 50 (1) 1 (33)

QoQ growth (%) 94 (53) 10 (0) 30

DuPont analysis







Return on equity 22.4 29.4 26.7 24.9 24.4

Company profile

KEC International is one of the leading power transmission tower

EPC companies in the world. The company has executed projects

across ~40 countries and has the capability of executing ~100

projects simultaneously. International orders constitute about ~50%

of the current order backlog.


(%) Sep-09 Dec-09 Mar-10

Promoters 41.9 41.9 42.0

FIIs 5.7 5.6 5.4

Banks & FIs 41.9 42.4 42.7

Public 10.5 10.1 9.9




Stock performance

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Siemens Ltd Initiating Coverage 21 June 2010

56



EBITDA margin 13.6 12.8 12.6 12.6

EBIT margin 11.9 11.3 11.2 11.2


ROE 25.4 25.3 25.1 23.3

ROIC 35.5 35.3 35.0 32.5

ROCE 35.5 35.3 35.0 32.5



Revenue 92,154 117,858 145,510 165,640

Growth (%) (1.4) 27.9 23.5 13.8

Adj net income 7,837 9,542 11,656 13,347

Growth (%) 41.3 21.8 22.2 14.5

FDEPS (Rs) 23.2 28.3 34.6 39.6

Growth (%) 41.3 21.8 22.2 14.5

Siemens Ltd At an inflection point

Siemens’s (SIEM’s) business model is backed by a strong product profile. We believe that over the next two years, capital goods players with a superior product profile and contracting abilities are likely to outperform. At the current estimates, the stock trades at a P/E of 25.8x and 21.1x its FY11E and FY12E earnings respectively. We believe that the company’s FY11E earnings have a potential to surprise positively, driven by higher-than-expected order inflows in FY10E. We initiate coverage on SIEM with a BUY recommendation and a one year target price of INR 925, implying 27% upside from current levels.

Broadest product offering in the capital goods sector: SIEM has the broadest product offering in India’s capital goods sector, with its products addressing the requirement of most process industries. Further, the company has a strong presence in the infrastructure space through the power, water, and railway verticals. We believe that the company is well-placed to leverage on its expertise in these high-growth infrastructure verticals, and thus ensure continued growth in its overall business profile.

Large ticket international projects may aid growth: At H1FY10-end, SIEM’s order backlog stood at Rs 134.4bn, higher 39% YoY. This growth was driven a sharp 161% YoY increase in order inflows during Q1FY10 to Rs 51.6bn. Further, SIEM, in a consortium with Siemens AG, has secured a repeat order worth Rs 29.5bn from Qatar General Electricity & Water Corporation in January ’10. With the growth in the order backlog and order inflows picking up, the revenue growth prospects for SIEM look bright over the foreseeable future.

Domestic presence to strengthen: SIEM aims to strengthen position in the renewable energy and value priced products in India over the next three years at an outlay of INR 16 bn. Further the company intends to make India the hub for six categories of value priced products. SIEM will have complete responsibility for design, development, production and sale of these products for India and for the world market. The company also intends to strengthen the workforce from 17000 currently to 25000 by 2012.

Strong potential upsides; Buy: At the current estimates, the stock trades at a P/E of 25.8x and 21.1x its FY11E and FY12E earnings respectively. The EV/ EBITDA for the stock is 15.4x and 12.7x. When normalised for growth, the EVEG ratio is at 0.71x and 0.59x for FY11E and FY12E respectively. We note that even as the EVEG ration for SIEM are in the top quartile, SIEM has one of the most technologically advanced product profile in the sector. We initiate coverage on the stock with a Buy recommendation.


Rs 731 Rs 925 BUY LOW

BSE NSE BLOOMBERG

500550 SIEMENS SIEM IN

Company data



Free float (%) 29.3




Stock performance


Siemens 731 5.0 (0.5) 30.6

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

31.525.8 21.123.1

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Valuation matrix


P/E @ CMP 31.5 25.8 21.1 18.5

P/E @ Target 39.8 32.7 26.8 23.4

EV/EBITDA @ CMP 18.5 15.4 12.7 11.1

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 117,858 115,369 145,510 128,366

EPS (Rs) 28.3 27.4 34.6 29.8


57

Investment rationale

Superior product profile

Broadest product offering in the capital goods sector Siemens (SIEM) has the broadest product offering in India’s capital goods sector with its products addressing the needs of most process industries (see Fig 1). The company also has a strong presence in the infrastructure space through the power, water and railway verticals. We believe that the company is in excellent position to leverage on its expertise in these high-growth verticals.

Fig 73 - Detailed product profile of SIEM

No. Industry served Offerings for the industry Business unit classification

1 Automotive Control cabinet construction Industry solutions

Assembly Industry solutions

Start up assistance Industry solutions

2 Cement Process instrumentation Industry solutions

Weighers and analytical devices Industry solutions

Electric automation, drives and instrumentation systems Industry automation and drive technologies

Building system engineering Industry solutions

3 Glass industry Manufacturing execution systems Industry solutions

Process control technology, Industry solutions

Motive power engineering Industry solutions

Instrumentation and analysis Industry solutions

4 Pulp & Paper industry SIPAPER product family Industry solutions

Electrical engineering systems, Industry solutions

Automation and Industrial IT Industry automation

5 Marine Diesel-electric propulsion systems for cargo ships through the product Siemens-Schottel-Propulsor (SSP)

Industry solutions

SSP for offshore vessels Industry solutions

SINAVY product family for naval vessels Industry solutions

6 Metals Continuous Casting for converting steel from liquid to solid state Industry solutions

Siemens IS Metal technologies product family for iron/steel making Industry solutions

Rolling mills Industry solutions

Steel processing lines Industry solutions

7 Mining and material handling

material operation, excavation, transportation, beneficiation, power supply, water treatment, security systems and communication

Industry solutions

8 Sugar Power distribution and supply within the company Industry solutions

Life cycle services Industry solutions

9 Water Waste Water Treatment Industry solutions

Process Water (High Purity Systems) Industry solutions

Drinking Water treatment ( Chemical Feed & Disinfection Systems) Industry solutions

Treatment Plants Service Industry solutions

Energy And Automation in Water Systems Industry automation



58

Fig 74 - Detailed product profile of SIEM

No. Industry served Offerings for the industry Business unit classification

10 Railway Bogies- SF 2000 motor and SF 2100 motor. Used in mass rapid transit vehicles such as urban rail vehicles and metro cars

Mobility

Auxiliary power supply to feed air conditioner, heater etc in trains Mobility

Propulsion System including Traction Converter and Traction Motor Mobility

Signaling and Control Equipment for automation of mainline and metro projects Mobility

Siemens K50 relay for signaling circuits Mobility

Track vacancy detection systems Mobility

Auxiliary Warning System Mobility

11 Power Generation Process compressors Power Generation

Turbines and generators Power Generation

Siemens combined cycle plants Power Generation

Instrumentation and controls Power Generation

12 Power transmission 3AP SF6- High voltage circuit breakers up to 800 kV Power transmission and distribution

Instrument transformers from 72.5 V to 800 kV Power transmission and distribution

Medium voltage switchgears- Air insulated switchgear, gas insulated switchgear and air insulated metal clad switchgear Power transmission and distribution

Turnkey solutions for substation and switchyards Power transmission and distribution

13 Healthcare Diagnostic imaging and therapy Healthcare

Laboratory diagnostics Healthcare


Impressive product profile in the infrastructure vertical Infrastructure-related verticals contributed 51% of SIEM’s revenues in FY09. It may be noted that the contribution from the mobility vertical stood at 11% in FY09, up by 300bps YoY; the growth in this vertical was significantly higher at 47.6% YoY in FY09. We highlight the same due to the company’s product profile in the railways facing vertical.

Fig 75 - Business Vertical wise Revenue Contribution Siemens Ltd, September Y/E FY08 FY09

Industry 44% 47%

Industry Automation 11% 10%

Drive Technologies 11% 13%

Bulding Technologies 1% 1%

Industry Solutions 13% 12%

Mobility 8% 11%

Energy 48% 46%

Fossil Power Generation 1% 5%

Oil & Gas 6% 6%

Power Transmission 32% 26%

Power Distribution 9% 9%

Healthcare 7% 6%

Real Estate 1% 1%


One of the key growth drivers for the mobility vertical is the spend in ‘Mass rapid transport system’ through Jawaharlal Nehru National Urban Renewal Mission (JNNURM). Under this scheme, 478 projects worth Rs 520bn have been sanctioned from 2005 (see Fig 3). Of this, 9.2% funds have been sanctioned for 20 Mass Rapid Transit System (MRTS) projects. Detailed project reports (DPR) have also been submitted for additional ~500 projects under JNNURM.


59

Fig 76 - Sanctioned projects under the JNNURM scheme

Sr Sector Number of

projects sanctioned

% of projects sanctioned

Cost of projects

sanctioned (Rs bn)

% of cost of projects

sanctioned

Funds released

(Rs bn)

% of Fundsreleased

1 Drainage/Storm Water Drainage 62 13.0 78.6 15.1 12.1 12.5

2 Roads/Flyovers 76 15.9 35.1 6.7 8.0 8.3

3 Water Supply 143 29.9 190.4 36.6 38.5 39.7

4 Sewerage 105 22.0 131.4 25.3 21.3 22.0

5 Urban Renewal 10 2.1 4.7 0.9 0.6 0.7

6 Mass Rapid Transport System 20 4.2 47.7 9.2 10.7 11.0

7 Other Urban Transport 14 2.9 8.1 1.6 1.3 1.4

8 Solid Waste Management 40 8.4 21.9 4.2 3.7 3.9

9 Development of Heritage Areas 2 0.4 0.5 0.1 0.4 0.4

10 Preservation of Water Bodies 4 0.8 1.2 0.2 0.2 0.2

11 Parking 2 0.4 1.1 0.2 0.2 0.2

Total 478 100.0 520.5 100.0 97.1 100.0

Source: RCML Research

Indian railways (IR) is also one of SIEM’s largest customers in this vertical. IR first introduced its diesel-electric freight / passenger locomotives (4000 HP) with three-phase AC traction technology in 1999. SIEM has been supplying the traction equipment for these locomotives ever since, and has upgraded to the latest Insulated Gate Bipolar Transistors (IGBT) technology in 2006. Through these upgrades, SIEM has enhanced the locomotive power of this product to 4500HP from 4000HP. The company has already supplied the enhanced product to IR in February ’10; an additional 200 units of the upgraded product are expected to be supplied in 2010-11.

Large ticket international projects may aid growth

Bags repeat order worth ~Rs 29bn from Qatar At H1FY10-end, SIEM’s order backlog stood at Rs 134.4bn, a growth of 39% YoY driven by a sharp 161% YoY increase in order inflows in Q1FY10 to Rs 51.6bn. The company, in a consortium with Siemens AG, also secured a repeat order worth Rs 29.5bn from Qatar General Electricity & Water Corporation in January ’10. The contract value of this order for SIEM is Rs 24.9bn, while the execution period is at 39 months. We believe that the revenue growth prospects for SIEM look bright over the foreseeable future, given the improving order book position. Some of the recent orders secured by the company are outlined below.


60

Fig 77 - Recently secured orders

Date Awarded by Ticket size (Rsmn) Brief description

Feb 2010 Prakash Industries 550 Supply of 100 MW Turbo Generators

Feb 2010 Power Grid Corporation of India ltd.

1000 Supply of high end technology products like circuit breakers , current & voltage transformers , capacitors etc.

Jan 2010 Qatar General Electricity & Water Corporation

24910 Complete design, engineering, supply, erection, civil, testing and commissioning of substations

Nov 2009 Qatar General Electricity & Water Corporation

6080 Supply, design, erection, testing and commissioning of 132kV & 66kV high voltage cables

Oct 2009 Ezdan International Housing Project, Qatar

4030 Supply, design, erection, testing and commissioning of substations

Sep 2009 Power Grid Corporation of India ltd.

3600 Supply, design, engineering, erection, testing and commissioning of substations

July 2009 Power Grid Corporation of India ltd.

1090 Supply, design, engineering, erection, testing and commissioning of substations

June 2009 Vedanta Aluminum ltd. 1120 To provide high voltage power distribution system

Apr 2009 Adani Power ltd. 7200 To install a bipolar HVDC transmission system

Source: Company

Domestic expansion on the cards

Outlay of Rs 16bn earmarked for domestic expansion SIEM aims to strengthen its domestic presence in segments such as renewable energy and value-priced products over the next three years, at an outlay of Rs 16bn. Of this, Rs 5bn will be incurred on building plants for manufacturing high-end wind technology turbines. The company expects this plant to commence operations by 2012. SIEM is also likely to make India the hub for six categories of value-priced products (see fig. 5).

Fig 78 - India – SIEM’s new hub for value- priced products

No Value priced products Business unit classification

1 Low-end signalling system Mobility

2 Ring main units Mobility

3 Steam turbine generator greater than 45 MW Power generation

4 Iron and steel making equipment Industry solutions

5 Wind power engineering Power generation

6 EPC execution for full turnkey power plants solution Power generation


The company targets to generate revenues of Rs 65bn from value-priced products business by 2020. SIEM will have complete responsibility for design, development, production and sale of these products for India and for the world market. The company also intends to strengthen the workforce from 17000 currently to 25000 by 2012 to support its expanded presence in India.

Subsidiaries – positive surprise likely

Some subsidiaries offer high growth potential Historically, investors have been disappointed with the manner in which SIEM has handled its subsidiary portfolio. While we do not rule out that the company could undertake actions which may not be in the best interests of the minority shareholders, we believe some of the current subsidiaries offer high potential in terms of growth and returns.

Flender, a wholly owned subsidiary, is engaged in manufacturing and marketing industrial gearboxes and related accessories. This acquisition has strengthened SIEM’s automation and drives business by adding gear systems to its product profile.


61

Siemens Building Technologies Pvt. Ltd. focuses on design, development and manufacture of embedded control systems, building automation systems, fire safety solutions, and security solutions – areas with high-growth potential.

Fig 79 - Financial performance snapshot of consolidated, parent and subsidiaries

Particulars , INRmn 2007 2008 2009

Siemens Consolidated

Revenues 94,175 97,296 93,491

PBT 9,071 8,187 9,382

PBT margin (%) 9.6% 8.4% 10.0%

PAT 6929 5995 7046

PAT margin (%) 7.4% 6.2% 7.5%

Siemens Standalone

Revenues 77,660 83,577 84,585

PBT 7,959 7,672 10,030

PBT margin (%) 10.2% 9.2% 11.9%

PAT 5965 5933 10449

PAT margin (%) 7.7% 7.1% 12.4%

Flender Ltd

Revenues - - 389

PBT - - 68

PBT margin (%) - - 17.5%

PAT - - 44

PAT margin (%) - - 11.3%

Siemens Buliding Technologies Pvt. ltd.

Revenues 363 2086 1773

PBT (9) 125 (143)

PBT margin (%) -2.4% 6.0% -8.1%

PAT (7) 93 (146)

PAT margin (%) -1.8% 4.5% -8.3%


Fig 80 - Stake in subsidiaries

Name of Subsidiary 2007 2008 2009

Siemens Information System 100.0% 100.0% -

Flender - 50.0% 100.0%

Siemens Information Processing Services 51.0% 51.0% -

Siemens Industrial Turbomachinery Services 100.0% - -

Siemens Rolling Stock - 100.0% 100.0%

Siemens Building Technologies 77.0% 79.3% 86.2%



62

Valuations

Valued at 25.8x/21.1x FY11/FY12E earnings At our current consolidated estimates SIEM trades at a P/E multiple of 25.8 and 21.1x for FY11E and FY12E respectively. The stock has historically traded between a PE band of 20x and 30x. The EV/ EBITDA for the stock is 13.7x and 11.3x. When normalized for growth the EVEG is at 0.71x and 0.59x for FY11E and FY12E respectively. We highlight that even as the EVEG metrics for SIEM is in the top quartile, it needs to be noted that SIEM has one of the most technologically advanced product profile in the sector.

We believe given the fundamental improvement in the business model of the company and the growth in the power transmission equipment market, the company trades at a discount to other peers of a similar pedigree in the industry. We initiate coverage on SIEM with a BUY recommendation, with a target price of INR 925, implying a target P/E of 27x.

Fig 81 - Siemens P/E band chart

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Fig 84 - ROCE

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64

Key risks

Margins profile on international orders: SIEM’s order inflows have been robust in H1FY10, driven by orders from the international markets. Historically, the company has generated significantly lower margins in the international orders, which led to lower-than-expected earnings growth and RoCE. While we believe that the probability of this happening is low, the margin accretion for these orders needs to be keenly watched.

Order backlog mix and order inflows: Currently, the order backlog has high concentration of orders from Qatar General Electricity & Water Corporation. Any significant delay in execution of these orders is likely to impact growth estimates negatively.


65


Profit and Loss statement Balance sheet Y/E September (Rs mn) FY10E FY11E FY12E FY13E

Revenues 92,154 117,858 145,510 165,640

Growth (%) (1.4) 27.9 23.5 13.8

EBITDA 12,502 15,086 18,272 20,800

Growth (%) 18.9 20.7 21.1 13.8


EBIT 10,979 13,342 16,328 18,632

Growth (%) 25.0 21.5 22.4 14.1

Interest

Other income 571 726 856 1,042

EBT 11,550 14,069 17,183 19,674

Income taxes 3,811 4,643 5,671 6,492





Adjustments - - - -


Growth (%) 41.3 21.8 22.2 14.5


FDEPS (Rs) (adj) 23.2 28.3 34.6 39.6

Growth (%) 41.3 21.8 22.2 14.5

DPS (Rs) 5.0 5.0 5.0 5.0

Y/E September (Rs mn) FY10E FY11E FY12E FY13E

Cash and cash eq 26,810 32,270 40,568 52,829


Inventories 10,663 13,706 16,925 19,248


Investments 0 0 0 0


Net fixed assets 8,956 8,591 8,083 7,418

CWIP - - - -

Intangible assets

Deferred tax assets, net - - - -

Other assets (0) (0) (0) (0)

Total assets 95,124 115,621 141,147 165,553



Provisions 10,213 13,083 16,166 18,378

Debt funds 9 9 9 9






BVPS (Rs) 100.4 123.4 152.5 186.6

Cash flow statement Financial ratios Y/E September (Rs mn) FY10E FY11E FY12E FY13E


Non-cash adjustments 1,196 - - -

Changes in working capital 2,884 (2,646) (2,038) 100


Capital expenditure 406 (1,378) (1,436) (1,503)



Cash flow from investing 406 (1,378) (1,436) (1,503)


Issue/repay debt 2 - - -

Dividends paid (11,025) (12,170) (14,461) (12,360)

Other financing cash flow 9,240 10,370 12,633 10,509



Economic Value Added (EVA) analysis Y/E September FY10E FY11E FY12E FY13E

WACC (%) 12.1 12.1 12.1 12.1

ROIC (%) 35.5 35.3 35.0 32.5


EVA (Rs mn) 795,003 966,757 1,181,970 1,288,178

EVA spread (%) 23.43 23.20 22.95 20.45

Y/E September FY10E FY11E FY12E FY13E


EBITDA margin 13.6 12.8 12.6 12.6

EBIT margin 11.9 11.3 11.2 11.2


ROE 25.4 25.3 25.1 23.3

ROCE 35.5 35.3 35.0 32.5




Payables (days) 261 242 235 242

Current ratio (x) 1.4 1.4 1.5 1.5

Quick ratio (x) 1.2 1.3 1.3 1.4







EV/Sales 2.5 2.0 1.6 1.4

EV/EBITDA 18.5 15.4 12.7 11.1

P/E 31.5 25.8 21.1 18.5

P/BV 7.3 5.9 4.8 3.9


66

Quarterly trend


Revenue (Rs mn) 23,830 19,177 25,180 18,666 22,261

YoY growth (%) 11.2 6.0 53.5 (21.7) 16.1

QoQ growth (%) 45.3 (19.5) 31.3 (25.9) 19.3

EBITDA (Rs mn) 3,304 2,374 2,255 3,421 2,624

EBITDA margin (%) 13.9 12.4 9.0 18.3 11.8


YoY growth (%) 13,501.8 (0.8) (39.5) 90.5 (19.7)

QoQ growth (%) 81.7 (25.5) (18.9) 73.5 (23.4)

DuPont analysis







Return on equity 21.9 25.4 24.3 23.2 21.8

Company profile

SIEM is a 55% subsidiary of Siemens AG, Germany, which has

presence in more than 190 countries. The company offers diverse

products and services solutions in power generation, transmission

and distribution, automation & drives, industrial solution, and

healthcare. It has a nation-wide sales and service network, 17

manufacturing plants, and a 500 strong network of channel

partners.


(%) Sep-09 Dec-09 Mar-10

Promoters 55.2 55.2 55.2

FIIs 3.5 3.6 3.6

Banks & FIs 25.1 25.4 25.8

Public 16.2 15.8 15.4




Stock performance

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● Buy

Suzlon Energy Ltd Initiating Coverage 21 June 2010

67




EBIT margin 1.3 1.6 5.2 5.7

Adj PAT margin (5.7) (2.5) 1.1 1.3

ROE (14.7) (7.2) 3.6 4.2

ROIC 1.3 1.6 6.2 6.6

ROCE 1.1 1.5 5.5 6.0



Revenue 207,792 210,409 234,531 248,808

Growth (%) (20.9) 1.3 11.5 6.1

Adj net income (11,945) (5,336) 2,618 3,159

Growth (%) (205.4) (55.3) (149.1) 20.7

FDEPS (Rs) (7.7) (3.4) 1.7 2.0

Growth (%) (201.4) (55.3) (149.1) 20.7

Suzlon Energy Ltd Uncertain prospects; Sell

A reduction in leverage and a pick up in domestic order inflows have been the key positives for SUEL in FY10. However, in terms of operating performance, it has been lagging in critical markets of US and China; this is likely to impact the company’s future order inflows. We estimate that SUEL’s financials would remain under pressure over the medium term. At our diluted EPS estimate of Rs 1.5 for FY12E, the stock is trading at a P/E of 34.2x. We believe given the extended and uncertain path to recovery, the current valuations are unwarranted. We initiate coverage on the stock with a Sell recommendation.

Domestic market share loss in FY10 likely: Globally, wind power capacity addition in CY09 was at 37.4GW (up 32.9% YoY), 22.3% higher than the estimates of Global Wind Energy Council at the beginning of the year. This increase was primarily driven by incremental capacities in the US and Chinese markets, as capacity addition lagged estimates in most other top ten global markets. In FY10, SUEL delivered 1460MW globally, a drop of 47.7% YoY, implying a loss of market share in the year. Based on proforma calculations, we estimate that the company lost market share in all three of its main markets, i.e. India, US, and China. However, the most critical market share loss for SUEL may have been in India – according to industry estimates, India added 1271MW of wind power capacity in CY09, while SUEL delivered only 688MW of wind power capacity in India in FY10.

Financial leverage still high: With the stake sale of Hansen Transmissions, few rounds of funds raising and refinancing options have been exercised by SUEL. This mitigates the risk of bankruptcy in our view. At the consolidated level, however, the company still carries a debt of ~Rs 126.7bn, leading to a D/E ratio of ~1.7x at FY10-end. Hence, we believe that even as the company is likely to turn positive at the operating level in FY11E, high financial leverage may translate into losses for the consolidated entity during the year.

Declining order inflows in international markets – a concern: The implied order inflows from the international geography for the parent stood at 281MW in FY10, (a significant drop from the highs of FY08), even as the wind power capacity addition exceeded expectations in the two largest markets – US and China on stimulus spending. However, the order inflows for the company have picked in the domestic geography, particularly on significant inflows in H2FY10. In fact, on a YoY basis, domestic order inflows grew 26.9% to 843MW in FY10, after declining 23.4% in FY09.


Rs 57 Rs 45 SELL HIGH

BSE NSE BLOOMBERG

532667 SUZLON SUEL IN

Company data

Market cap (Rs mn / US$ mn) 139,982 / 3,022

Outstanding equity shares (mn) 1,764

Free float (%) 833.2

Dividend yield (%) -


2-month average daily volume 22,709,480

Stock performance


Suzlon 57 (11.1) (22.9) (30.7)

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

34.2

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Valuation matrix


P/E @ CMP - - 34.2 28.3

P/E @ Target - - 26.8 22.2

EV/EBITDA @ CMP 23.3 20.7 10.8 9.6

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 210,409 226,011 234,531 275,332

EPS (Rs) (3.4) 0.6 1.7 4.3


68

Unfavourable cross-currency movements to offset RE Power performance: The performance of RE Power has been encouraging in FY10. The company’s order backlog grew by 41.1% to € 2.1bn at FY10-end, driven by a 17.2% YoY growth in order inflows. Further, its EBITDA margin expanded 90bps YoY to 8.6% in FY10. We believe that even as RE Power may sustain its performance, the appreciation in the rupee versus the euro would offset the impact of this performance at the consolidated level.

Rich valuations unwarranted; Sell: We believe that SUEL’s financials are likely to remain under pressure over the medium term and with a current financial leverage of ~1.7x, it will have to grow across geographies to breakeven. At our diluted EPS estimate of Rs 1.7 for FY12E, the stock is trading at a P/E of 34.2x. We believe that given the extended and uncertain path to recovery, the current valuations are unwarranted. Hence, we initiate coverage on the stock with a Sell.

Fig 87 - RoCE

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Fig 89 - Working Captial as % of Sales

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Pick up in order inflows from international geography: While order inflows from the domestic geography have improved, an uptick in order inflows from the international geography could present an upside risk to our estimates. According to our proforma calculations, SUEL lost market share in FY10 in its international markets.


70



Revenues 207,792 210,409 234,531 248,808

Growth (%) (20.9) 1.3 11.5 6.1

EBITDA 9,431 10,585 20,356 22,884

Growth (%) (66.5) 12.2 92.3 12.4


EBIT 2,801 3,274 12,301 14,222

Growth (%) (87.5) 16.9 275.7 15.6

Interest 11,950 9,965 10,165 11,131

Other income 695 1,221 906 607

EBT (8,455) (5,469) 3,043 3,699

Income taxes 3,561 - 548 666

Effective tax rate (%) (42.1) - 18.0 18.0

Extraordinary items (2,119) - - -


Reported net income (9,826) (5,336) 2,618 3,159

Adjustments 2,119 - - -

Adjusted net income (11,945) (5,336) 2,618 3,159

Growth (%) (205.4) (55.3) (149.1) 20.7

Shares outstanding (mn) 1,556.8 1,556.8 1,556.8 1,556.8

FDEPS (Rs) (adj) (7.7) (3.4) 1.7 2.0

Growth (%) (201.4) (55.3) (149.1) 20.7

DPS (Rs) - - - -


Cash and cash eq 32,167 16,678 5,972 8,318


Inventories 59,940 73,307 65,132 63,603




Net fixed assets 90,540 104,570 142,856 180,534

CWIP 19,840 19,840 19,840 19,840

Intangible assets


Other assets 2,540 - - -

Total assets 321,085 334,671 345,158 379,680



Provisions 9,950 9,786 9,597 11,088

Debt funds 127,057 122,057 132,057 146,217

Other liabilities 23,224 23,351 23,500 23,660

Equity capital 4,064 4,064 4,064 3,114




BVPS (Rs) 49.2 45.8 47.4 48.9


Net income + Depreciation (5,315) 1,974 10,672 11,821

Non-cash adjustments (1,358) - - -

Changes in working capital (9,570) 6,211 14,812 23,496

Cash flow from operations (16,243) 8,184 25,484 35,317

Capital expenditure 35,644 (21,340) (46,340) (46,340)


Other investing cash flow 1,440 2,540 - -

Cash flow from investing 37,026 (18,800) (46,340) (46,340)

Issue of equity 117 - - (950)

Issue/repay debt (21,639) (5,000) 10,000 14,160

Dividends paid (67) (67) (67) (67)

Other financing cash flow 2,275 193 216 226

Change in cash & cash eq 1,469 (15,489) (10,706) 2,346



WACC (%) 11.0 11.0 11.0 11.0

ROIC (%) 1.3 1.6 6.2 6.6


EVA (Rs mn) (1,976,724) (1,804,340) (992,845) (965,036)

EVA spread (%) (9.71) (9.33) (4.82) (4.34)




EBIT margin 1.3 1.6 5.2 5.7

Net profit margin (5.7) (2.5) 1.1 1.3

ROE (14.7) (7.2) 3.6 4.2

ROCE 1.1 1.5 5.5 6.0




Payables (days) 255 250 257 261

Current ratio (x) 2.2 1.8 1.6 1.3

Quick ratio (x) 1.2 1.0 1.0 0.8







EV/Sales 1.1 1.0 0.9 0.9

EV/EBITDA 23.3 20.7 10.8 9.6

P/E - - 34.2 28.3

P/BV 1.2 1.3 1.2 1.2


71

Quarterly trend


Revenue (Rs mn) 92,079 41,714 48,352 56,084 61,642

YoY growth (%) 33.3 (30.7) (19.2) (33.1)

QoQ growth (%) 32.6 (54.7) 15.9 16.0 9.9

EBITDA (Rs mn) 6,185 (1,503) (668) 1,074 3,898

EBITDA margin (%) 6.7 (3.6) (1.4) 1.9 6.3

Adj net income (Rs mn) 2,547 (4,344) (3,353) (2,296) (1,951)

YoY growth (%) (281.6) (231.5) (159.8) (176.6)

QoQ growth (%) (33.7) (270.5) (22.8) (31.5) (15.0)

DuPont analysis



Interest burden (PBT/EBIT) 71.9 (301.9) (167.0) 24.7 26.0




Return on equity 13.5 (14.7) (7.2) 3.6 4.2

Company profile

Suzlon is one of the leading wind power and turbine company in

the world with a presence in over 21 countries. The company has a

strong presence in the markets of India, Australia, US, Portugal and

Spain. Through its subsidiary the company has strong presence in

France and other parts of Europe.


(%) Sep-09 Dec-09 Mar-10

Promoters 53.1 53.1 53.1

FIIs 15.2 15.5 13.6

Banks & FIs 15.2 13.5 13.5

Public 16.6 17.9 19.9



21-Jun-10 Initiating Coverage 57 45 Sell

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Techno Electric & Engineering Company Ltd Initiating Coverage 21 June 2010

72



EBITDA margin 21.7 20.9 19.9 19.0

EBIT margin 17.7 17.3 16.7 16.0

Adj PAT margin 17.4 17.4 16.6 16.1

ROE 43.0 34.2 28.5 25.2

ROIC 25.5 18.5 18.8 18.8

ROCE 36.7 23.1 22.8 22.3



Revenue 7,066 8,053 9,521 11,186

Growth (%) 45.4 14.0 18.2 17.5

Adj net income 1,228 1,404 1,578 1,805

Growth (%) 89.0 14.3 12.4 14.3

FDEPS (Rs) 21.5 24.6 27.7 31.7

Growth (%) 89.0 14.3 12.4 14.3

Techno Electric & Engineering Company Ltd Strong fundamentals, attractive valuations – Buy

Techno Electric (TEE) has one of the most profitable business models in India’s power contracting value chain. We believe that the business model derives its strength from the company’s superior project management skills and its selective approach in servicing clients. The stock, currently trading at a P/E of 11.7x and 10.4x its FY11E and FY12E earnings, offers significant upsides from current levels. We initiate coverage on TEE with a Buy and a target price of Rs 400.

High growth likely in power generation EPC, the key addressable market: TEE has the expertise to cater to ~17–20% of the total required spend in power generation plants. The company’s addressable market in this vertical is expected to increase by ~183% in the 11th plan (over the 10th Plan) to ~Rs 450bn, given the planned increase in generation capacity.

Foray into renewable energy to provide scalability to business: TEE acquired wind energy assets of 95MW in April ’09. Through these wind farms, the company supplies power to state distribution utilities in Karnataka and Tamil Nadu. In addition to this, TEE is setting up biomass-based power plants of ~40MW capacity in the eastern India. These plants would start coming on stream from FY12E onwards. While the returns from the utilities business are lower than that from the contracting business, we believe that this diversification is a logical progression for the company, given its strong capital position.

Selective approach leads to superior working capital management: At FY09-end, TEE, at the parent level, had a gross block of Rs 100mn, implying a fixed asset turnover of ~101.4x. The company has been significantly ahead of the industry in managing working capital (working capital turnover of ~15x in FY09), primarily by catering to a select set of clients. Though this selective approach may result in subdued topline growth vis-à-vis the industry, it is likely to yield higher returns (RoCEs) due to a superior working capital turnover.

Strong upside potential; Buy: TEE has one of the most profitable business models in India’s power contracting value chain. We have valued the subsidiary portfolio (using the NPV method) at Rs 50/share. Hence, the implied P/E of the parent business is at 12.1x and 10.8x for FY11E and FY12E respectively. We believe that TEE’s increasing exposure to the utility space is likely to complement the cash flows of its contracting business. At a consolidated level, the stock is trading at P/E of 11.7x and 10.4x its FY11E and FY12E earnings respectively. We believe that the stock offers significant upside potential from current levels. We initiate coverage on TEE with a Buy rating and a target price of Rs 400.



BSE NSE BLOOMBERG

505397 TECHNOELEC TEE IN

Company data

Market cap (Rs mn / US$ mn) 16,482/355


Free float (%) 33.9




Stock performance


TEE 289 5.4 28.9 65.7

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

13.4 11.7 10.4

23.117.7 15.0

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TEEC Industry(x)

Valuation matrix


P/E @ CMP 13.4 11.7 10.4 9.1

P/E @ Target 18.6 16.3 14.4 12.6

EV/EBITDA @ CMP 10.7 9.8 8.7 7.8

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 8,053 8,606 9,521 10,166

EPS (Rs) 24.6 20.9 27.7 26.3


73

Fig 90 - P/E Band Chart

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Key risks

Execution risks: Capacity expansion in India’s power sector under the 11th plan is likely to be higher than under the 8th, 9th and 10th plans combined. Earlier, utilities (customers) condoned execution delays. However, going ahead, timely execution will be critical for contractors. While TEE has been improving its execution capabilities and has not suffered any financial damage in this regard, we believe all EPC contractors in the power sector space run the risk of not executing projects as per stipulated specifications and with the scheduled time frame.

Increase in competition could hurt margins: EPC jobs in the power sector essentially have low capital and technology requirements, thus entry barriers are relatively lower. Only softer issues like managing customer relationships and project management skills may pose as barriers to entrants. However, risks in form of higher competition – and its negative impact on margins – exist, given the high return ratios that the industry is generating in the current cycle.


75



Revenues 7,066 8,053 9,521 11,186

Growth (%) 45.4 14.0 18.2 17.5

EBITDA 1,537 1,679 1,895 2,127

Growth (%) 169.8 9.3 12.9 12.2


EBIT 1,253 1,396 1,587 1,793

Growth (%) 122.4 11.4 13.7 13.0

Interest 303 228 208 176

Other income 525 540 541 578

EBT 1,474 1,708 1,920 2,195

Income taxes 246 304 342 391





Adjustments - - - -


Growth (%) 89.0 14.3 12.4 14.3


FDEPS (Rs) (adj) 21.5 24.6 27.7 31.7

Growth (%) 89.0 14.3 12.4 14.3

DPS (Rs) 1.0 1.0 1.0 1.0


Cash and cash eq 1,662 2,591 3,461 4,645


Inventories 4 4 5 6

Other current assets 86 99 116 135

Investments 1,514 1,514 1,514 1,514


Net fixed assets 4,374 4,100 4,202 4,278

CWIP - - - -

Intangible assets



Total assets 8,795 9,626 10,856 12,410



Provisions 75 87 101 118

Debt funds 3,700 3,200 2,650 2,150

Other liabilities





BVPS (Rs) 60.3 83.8 110.3 140.8




Changes in working capital 1,163 (182) 11 23







Issue/repay debt 3,280 (500) (550) (500)

Dividends paid (216) (216) (216) (216)

Other financing cash flow 149 149 149 149

Change in cash & cash eq 1,277 929 870 1,184



WACC (%) 11.5 11.5 11.5 11.5

ROIC (%) 25.5 18.5 18.8 18.8


EVA (Rs mn) 99,811 55,597 64,971 73,983

EVA spread (%) 13.98 6.97 7.27 7.27



EBITDA margin 21.7 20.9 19.9 19.0

EBIT margin 17.7 17.3 16.7 16.0


ROE 43.0 34.2 28.5 25.2

ROCE 36.7 23.1 22.8 22.3





Current ratio (x) 1.8 2.4 2.7 3.0

Quick ratio (x) 1.8 2.4 2.7 3.0







EV/Sales 2.3 2.1 1.7 1.5

EV/EBITDA 10.7 9.8 8.7 7.8

P/E 13.4 11.7 10.4 9.1

P/BV 4.8 3.4 2.6 2.1


76

Quarterly trend


Revenue (Rs mn) 1,171 1,235 1,487 1,512 2,040

YoY growth (%) 1.7 (5.0) 20.7 29.1 65.2

QoQ growth (%) (4.9) 5.4 20.4 1.7 34.9

EBITDA (Rs mn) 206 121 198 216 237

EBITDA margin (%) 17.6 9.8 13.3 14.3 11.6


YoY growth (%) 95.0 6.7 88.9 18.5 41.7

QoQ growth (%) 55.7 (9.7) 34.4 (2.3) 7.9

DuPont analysis







Return on equity 32.5 43.0 34.2 28.5 25.2

Company profile

TEE was incorporated in 1963 by the Mohankas of Jamshedpur to

provide EPC services to core sector industries in India. The

company went public in 1973. In 1995, Mr. P.P. Gupta became the

sole promoter. Broadly, TEE addresses the power generation, power

transmission and distribution and industrial sectors. TEE addresses

roughly ~17–20% of the total project requirements of power

generation plants. TEE has been involved in mechanical and

electrical auxiliary systems for utilities and upto ~67MW captive

power plants on turnkey basis.


(%) Sep-09 Dec-09 Mar-10

Promoters 55.0 55.0 55.0

FIIs 1.1 0.7 0.6

Banks & FIs 38.8 39.0 39.3

Public 5.1 5.3 5.2




Stock performance

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● Buy

Thermax Ltd Initiating Coverage 21 June 2010

77



EBITDA margin 12.1 12.0 11.9 11.6

EBIT margin 10.8 11.0 11.1 10.8


ROE 26.1 28.3 28.9 29.2

ROIC 35.1 41.0 42.5 39.0

ROCE 41.8 50.3 53.5 38.6



Revenue 31,855 42,130 55,090 66,130

Growth (%) (2.4) 32.3 30.8 20.0

Adj net income 2,563 3,198 4,155 5,351

Growth (%) (10.4) 24.8 29.9 28.8

FDEPS (Rs) 21.5 26.8 34.9 44.9

Growth (%) (10.4) 24.8 29.9 28.8

Thermax Ltd Positives priced in; Hold

Order inflows have been the bright spot for Thermax (TMX) in FY10. We believe that the growth in order inflows revs up the company’s revenue growth outlook for FY11E and FY12E. However, even as we believe that TMX has one of the most superior business models in India’s power and industrial contracting space, the current valuations factor in most of the positives and therefore hold limited upside potential. At the current estimates, the stock trades at a P/E of 26x and 20x its FY11E and FY12E earnings respectively. We initiate coverage on TMX with a Hold recommendation and a target price of Rs 710.

Diversification into supercritical boilers – a key milestone: In March ’10, TMX announced a JV with Babcock and Wilcox (B&W) for manufacturing supercritical boilers. The plant’s annual capacity is planned at 3GW and is slated to commence operations by FY12-end. We believe that this diversification will emerge as a key long-term positive for the company, as it has imparted higher scalability to TMX’s business model and filled the void in large size utility boilers. In the initial years though, working capital requirement in this business is likely to be higher and margins lower, which in turn would impact return ratios, going ahead. However, we believe that the potential growth from this diversification may more than offset the impact of lower return ratios in future years.

Growth in order backlog to keep execution strong in FY11E: TMX’s revenues have jumped 62.9% QoQ in Q4FY10, significantly higher than the trend seen in the last three years. Further, the scope of some large orders (Essar and Brahmani Steel orders) was reduced in Q4FY09, resulting in a lower order backlog at the FY09-end. We believe that execution would remain strong in the subsequent quarters as the company’s order inflows have started to pick up sharply from Q2FY10 onwards. At FY10-end, the order backlog at the standalone level was at Rs 53.8bn, up 86.1% YoY.

Valuations factor in most positives – Hold: At the current estimates, TMX trades at a P/E of 26x and 20x its FY11E and FY12E earnings respectively. The EVEG ratio for the company is at 0.64x and 0.49x for FY11E and FY12E respectively, on the higher side in the sector. We believe that even as the company’s business model attains higher scalability with the diversification into supercritical boilers, the current valuations leave limited room for upside. We initiate coverage on the stock with a Hold recommendation and a target price of Rs 710.


Rs710 Rs 710 HOLD LOW

BSE NSE BLOOMBERG

500411 THERMAX TMX IN

Company data



Free float (%) 33.9




Stock performance


Thermax 710 6.1 4.1 23.6

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

33.026.5

20.423.117.7 15.0

010

2030

40

FY10E FY11E FY12E

Thermax Industry(x)

Valuation matrix


P/E @ CMP 32.5 26.1 20.1 15.6

P/E @ Target 32.5 26.1 20.1 15.6

EV/EBITDA @ CMP 21.1 16.1 12.3 10.6

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 42,130 55,090

EPS (Rs) 26.8 34.9


78

Leadership position in industrial boilers, captive power plants: TMX has a robust business model that is driven by its leadership position in industrial boilers (30-32% market share) and captive power plant (~20% share) segments. One of the key strengths of its business model is its robust cash flows. This strength is particularly commendable in the light of the company’s business mix – TMX, as primarily a contracting company, derives ~70% of its revenues from projects and the remaining ~30% from products. We believe that TMX has been able to sustain healthy cash flows due to its selective approach in servicing clients, which in our view is an important characteristic of its business model.

Fig 94 - Thermax P/E band chart

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Fig 96 - RoCE

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Fig 98 - Working capital as a % of Sales

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Key risks

Execution of large ticket size projects: TMX will be executing large projects (of over >Rs 10bn ticket size) for the first time. While the company’s project management skill sets are best-in-class, we believe that any slippage on the execution front can negatively impact our earnings estimates for the company.


80



Revenues 31,855 42,130 55,090 66,130

Growth (%) (2.4) 32.3 30.8 20.0

EBITDA 3,841 5,052 6,583 7,659

Growth (%) (7.3) 31.5 30.3 16.3


EBIT 3,437 4,626 6,103 7,138

Growth (%) (10.1) 34.6 31.9 17.0


Other income 498 355 350 501

EBT 3,919 4,953 6,392 7,608

Income taxes 1,356 1,659 2,141 2,549


Extraordinary items (1,149) - - -

Min into / inc from associates - 96 96 (292)


Adjustments 1,149 - - -


Growth (%) (10.4) 24.8 29.9 28.8


FDEPS (Rs) (adj) 21.5 26.8 34.9 44.9

Growth (%) (10.4) 24.8 29.9 28.8

DPS (Rs) 5.0 5.0 5.0 13.0


Cash and cash eq 3,582 5,052 7,490 11,853


Inventories 2,838 3,352 4,386 5,286


Investments 1,765 2,765 3,515 3,515


Net fixed assets 4,538 4,612 4,882 4,862

CWIP - - - -

Intangible assets



Total assets 21,526 26,212 33,967 41,992



Provisions 1,046 1,236 1,617 1,949

Debt funds - - - -






BVPS (Rs) 83.8 105.6 135.4 172.0




Changes in working capital (231) (52) (97) (19)



Change in investments - (1,000) (750) -


Cash flow from investing (367) (1,500) (1,500) (500)


Issue/repay debt - - - -

Dividends paid - - - -

Other financing cash flow (2,195) (601) (601) (989)

Change in cash & cash eq 175 1,470 2,437 4,364



WACC (%) 11.3 11.3 11.3 11.3

ROIC (%) 35.1 41.0 42.5 39.0


EVA (Rs mn) 237,357 373,714 503,549 567,328

EVA spread (%) 23.77 29.70 31.20 27.68



EBITDA margin 12.1 12.0 11.9 11.6

EBIT margin 10.8 11.0 11.1 10.8


ROE 26.1 28.3 28.9 29.2

ROCE 41.8 50.3 53.5 38.6





Current ratio (x) 1.3 1.4 1.4 3.6

Quick ratio (x) 0.8 0.8 0.8 0.8





Adjusted debt/equity - - - -


EV/Sales 2.6 1.9 1.5 1.2

EV/EBITDA 21.1 16.1 12.3 10.6

P/E 32.5 26.1 20.1 15.6

P/BV 8.5 6.7 5.2 4.1


81

Quarterly trend


Revenue (Rs mn) 9,483 5,376 6,804 7,482 12,193

YoY growth (%) 2.8 (25.0) (15.4) (5.9) 28.6

QoQ growth (%) 19.3 (43.3) 26.6 10.0 62.9

EBITDA (Rs mn) 1,233 594 689 790 1,365

EBITDA margin (%) 13.0 11.0 10.1 10.6 11.2


YoY growth (%) 18.5 (27.0) (5.0) (21.8) 6.7

QoQ growth (%) 28.6 (50.0) 16.4 4.5 75.5

DuPont analysis







Return on equity 33.7 26.1 28.3 28.9 29.2

Company profile

TMX provides solutions in the energy and environment space. The

energy business contributes ~80% to revenues, whereas the

environment business contributes ~20%. Further, 20% of revenues

are from products and 80% of revenues are from projects. The

company’s market share for chillers is 90%, 35-38% for boilers and

heaters, 8% for water and waste water, 35% for chemicals, and

~60% for air treatment divisions.


(%) Sep-09 Dec-09 Mar-10

Promoters 62.0 62.0 62.0

FIIs 6.5 7.4 8.3

Banks & FIs 18.2 17.6 16.8

Public 13.4 13.0 12.9




Stock performance

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● Hold

Voltas Ltd Initiating Coverage 21 June 2010

82




EBIT margin 9.4 8.7 8.7 8.7


ROE 42.2 33.7 29.9 26.7

ROIC 46.4 37.6 34.3 31.4

ROCE 61.1 46.5 40.7 36.1



Revenue 48,236 53,072 58,866 64,825

Growth (%) 10.6 10.0 10.9 10.1

Adj net income 3,560 3,644 4,010 4,357

Growth (%) 58.0 2.4 10.1 8.7

FDEPS (Rs) 10.8 11.0 12.1 13.2

Growth (%) 58.0 2.4 10.1 8.7

Voltas Ltd Attractive valuations-Buy

We believe that the business model of Voltas (VOLT) has inherent strengths in the form of the company’s superior project management skills that lead to a light balance sheet and a high RoCE. Our target price for the stock is at Rs 220, implying a 17% upside from current levels. The stock has historically traded between a one year forward PE band of 18-30x. At our target price of Rs 220, the implied target P/E is 18x. We initiate coverage on VOLT with a Buy.

Order accretion shoots up in Q4FY10: Even as the order backlog in the Electro Mechanical Projects & Services (EMPS) segment remained flat YoY, VOLT’s order accretion of Rs 19bn in Q4FY10 is commendable. The order backlog for the company at the end of FY10 was at INR 47.2 bn. VOLT is likely to see further improvement in order booking during FY11E, driven by its focused efforts towards increasing market share in segments like industrial and infrastructure projects.

Completion of key projects leads to strong pre-qualification in FY10: VOLT has been associated with several prestigious projects in the recent past, particularly in the Middle Eastern market. These include the Burj Khalifa in Dubai, the Formula 1 race track in Abu Dhabi, the Ferrari Experience Theme Park and Etihad Towers Complex in Abu Dhabi, UAE. We believe that with the experience of these projects, the company is likely to have gained pre-qualifications for other high-end projects – a key long-term positive for the company.

EAS recovery could surprise, UCL to lead growth: VOLT’s engineering and agency services (EAS) was significantly hit by the domestic slowdown, leading to a 10% decline in revenues in FY10. In contrast, the UCL division posted a high growth of 28.7% YoY in FY10 in the backdrop of a severe summer season and improving realisations on high-end products. Further, we believe that the EAS segment could surprise positively going ahead due to a revival in mining and construction equipment demand.

Strong long-term bet; Buy: At our consolidated estimates, the stock trades at a P/E of 17.1x and 15.6x its FY11E and FY12E earnings respectively. We believe that while upsides to the current valuations may not be immediate, expectations of positive surprises on order wins are likely to support valuations. We believe that VOLT looks attractive over the long term, given its light balance sheet (inorganic growth likely) and impressive return ratios. Our target price for the stock is at Rs 220, implying a 17% upside from current levels. The stock has historically traded between a one year forward PE band of 18-30x. We initiate coverage on VOLT with a Buy.



BSE NSE BLOOMBERG

500575 VOLTAS VOLT IN

Company data



Free float (%) 63.5




Stock performance


VOLTAS 189 5.9 12.3 14.9

BSECG 14,462 6.4 3.3 5.0

Sensex 17,617 4.6 0.7 4.3

P/E comparison

17.5 17.1 15.6

23.117.7 15.0

05

10152025

FY10E FY11E FY12E

Voltas Industry(x)

Valuation matrix


P/E @ CMP 17.5 17.1 15.6 14.3

P/E @ Target 20.4 20.0 18.1 16.7

EV/EBITDA @ CMP 12.5 12.2 11.0 10.0

RCML vs consensus


RCML Cons RCML Cons

Sales (Rs mn) 53,072 54,849 58,866 63,309

EPS (Rs) 11.0 10.6 12.1 12.4


83

Fig 99 - Voltas P/E band chart

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Fig 101 - RoCE

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Revenues 45,570 50,139 55,639 61,276

Growth (%) 13.0 10.0 11.0 10.1

EBITDA 4,122 4,188 4,648 5,118

Growth (%) 55.9 1.6 11.0 10.1


EBIT 3,958 3,968 4,414 4,845

Growth (%) 59.7 0.3 11.2 9.7


Other income 604 807 853 884

EBT 4,493 4,687 5,204 5,662

Income taxes 1,414 1,531 1,752 1,907


Extraordinary items 364 - - -



Adjustments (364) - - -


Growth (%) 39.5 2.5 9.4 8.8


FDEPS (Rs) (adj) 9.3 9.5 10.4 11.4

Growth (%) 39.5 2.5 9.4 8.8

DPS (Rs) 1.7 1.8 1.8 1.8


Cash and cash eq 8,488 11,311 14,458.3 17,987

Accounts receivable 8,741 9,056 10,048.9 11,067

Inventories 10,460 9,799 9,236.6 8,369

Other current assets 2,562 2,764 3,052.5 3,348

Investments 2,358 2,358 2,358.0 2,358

Gross fixed assets 3,439 3,939 4,689.3 5,439

Net fixed assets 1,944 2,224 2,740.9 3,217

CWIP - - - -

Intangible assets

Deferred tax assets, net 216 216 215.9 216

Other assets

Total assets 34,770 37,727 42,111.2 46,563

Accounts payable 19,583 19,730 20,803.0 21,708


Provisions 4,129 4,437 4,911.6 5,325

Debt funds 1,474 1,517 1,599.1 1,673

Other liabilities - 1 - -

Equity capital 331 331 330.7 331

Reserves & surplus 9,253 11,711 14,465.7 17,524

Shareholder's funds 9,583 12,042 14,796.4 17,855

Total liabilities 34,770 37,727 42,110.2 46,562

BVPS (Rs) 29.0 36.4 44.7 54.0




Changes in working capital 2,216 600 828 873








Dividends paid (658) (697) (697) (697)

Other financing cash flow (127) 1 (1) 0




WACC (%) 12.1 12.1 12.1 12.1

ROIC (%) 40.3 32.2 29.5 27.0


EVA (Rs mn) 311,774 272,758 284,466 289,959

EVA spread (%) 28.20 20.12 17.35 14.85




EBIT margin 8.7 7.9 7.9 7.9


ROE 36.5 29.2 25.7 23.0

ROCE 53.1 39.9 35.0 31.0




Payables (days) 217 200 186 177

Current ratio (x) 1.3 1.4 1.4 1.5

Quick ratio (x) 0.5 0.5 0.5 0.5







EV/Sales 1.3 1.2 1.1 1.0

EV/EBITDA 14.5 14.3 12.9 11.7

P/E 20.3 19.8 18.1 16.6

P/BV 6.5 5.2 4.2 3.5


86

Quarterly trend


Revenue (Rs mn) 12,425 11,789 10,043 9,135 14,603

YoY growth (%) 47.5 17.1 8.2 5.5 17.5

QoQ growth (%) 43.5 (5.1) (14.8) (9.0) 59.8

EBITDA (Rs mn) 636 968 1,068 754 1,167

EBITDA margin (%) 5.1 8.2 10.6 8.3 8.0


YoY growth (%) 52.8 14.5 36.5 39.5 43.7

QoQ growth (%) 58.2 5.2 13.8 (26.3) 62.9

DuPont analysis

(%) Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10

Tax burden (Net income/PBT) 12,425 11,789 10,043 9,135 14,603


EBIT margin (EBIT/Revenues) 43.5 (5.1) (14.8) (9.0) 59.8

Asset turnover (Revenues/Avg TA) 636 968 1,068 754 1,167


Return on equity 674 709 807 594 968

Company profile

VOLT, is a leading air conditioning and engineering services

provider based in India. Tata group holds a stake of 27.9% in the

company. VOLT offers heating, cooling, ventilation and other

engineering services through three different business segments.


(%) Sep-09 Dec-09 Mar-10

Promoters 27.7 27.7 27.7

FIIs 10.9 11.3 9.0

Banks & FIs 38.5 39.0 41.1

Public 23.0 22.0 22.2




Stock performance

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● Buy

Coverage Profile

By recommendation By market cap (US$)

33

8

59

0

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Buy Hold Sell

(%)

55

39

6

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> $1bn $200mn - $1bn < $200mn

(%)

Recommendation interpretation

Recommendation Expected absolute returns (%) over 12 months

Buy More than 15%

Hold Between 15% and –5%

Sell Less than –5%

Recommendation structure changed with effect from March 1, 2009

Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary

mismatch between upside/downside for a stock and our recommendation.

Religare Capital Markets Ltd

4th Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.

Disclaimer

This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA).

This document is issued by Religare Capital Markets plc (“RCM”) in the UK, which is authorised and regulated by the Financial Services Authority in connection with its UK distribution. RCM is a member of the London Stock Exchange.

This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice.

RCM, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate finance advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note.

RCM accepts no liability whatsoever for any direct, indirect or consequential loss or damage of any kind arising out of the use of or reliance upon all or any of this material howsoever arising. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves risk, including the risk of capital loss.

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Religare-Capital Goods - Sector Report - June 2010

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